Table of Contents
Tax law changes for 2008. When you figure how much income tax you want withheld from your pay and when you figure your estimated tax, consider tax law changes effective in 2008. See What's New for 2008 in the front of this publication, or get Publication 553, Highlights of 2007 Tax Changes.
Estimated tax safe harbor for higher income taxpayers. If your adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you will have to deposit the smaller of 90% of your expected tax for 2008 or 110% of the tax shown on your 2007 return to avoid an estimated tax penalty.
Payment of estimated tax electronically. You may be able to pay your estimated tax by electronic means. For more information, see How To Pay Estimated Tax in chapter 2 of Publication 505.
This chapter discusses how to pay your tax as you earn or receive income during the year. In general, the federal income tax is a pay-as-you-go tax. There are two ways to pay as you go.
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Withholding. If you are an employee, your employer probably withholds income tax from your pay. Tax also may be withheld from certain other income, including pensions, bonuses, commissions, and gambling winnings. In each case, the amount withheld is paid to the IRS in your name.
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Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.
This chapter explains these methods. In addition, it also explains the following.
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Credit for withholding and estimated tax. When you file your 2007 income tax return, take credit for all the income tax withheld from your salary, wages, pensions, etc., and for the estimated tax you paid for 2007.
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Underpayment penalty. If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. In most cases, the IRS can figure this penalty for you. See Underpayment Penalty at the end of this chapter.
Publication
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505 Tax Withholding and Estimated Tax
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553 Highlights of 2007 Tax Changes
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919 How Do I Adjust My Tax Withholding?
Form (and Instructions)
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W-4 Employee's Withholding Allowance Certificate
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W-4P Withholding Certificate for Pension or Annuity Payments
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W-4S Request for Federal Income Tax Withholding From Sick Pay
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W-4V Voluntary Withholding Request
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1040-ES Estimated Tax for Individuals
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2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts
This section discusses income tax withholding on these types of income:
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Salaries and wages,
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Tips,
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Taxable fringe benefits,
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Sick pay,
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Pensions and annuities,
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Gambling winnings,
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Unemployment compensation, and
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Certain federal payments, such as social security.
This section explains in detail the rules for withholding tax from each of these types of income.
This section also covers backup withholding on interest, dividends, and other payments.
Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. See Supplemental Wages, later, for more information about reimbursements and allowances paid under a nonaccountable plan.
If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. This is explained under Exemption From Withholding, later.
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Pays you cash wages of less than $150 during the year, and
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Has expenditures for agricultural labor totaling less than $2,500 during the year.
The amount of income tax your employer withholds from your regular pay depends on two things.
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The amount you earn.
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The information you give your employer on Form W-4.
Form W-4 includes three types of information that your employer will use to figure your withholding.
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Whether to withhold at the single rate or at the lower married rate.
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How many withholding allowances you claim. (Each allowance reduces the amount withheld.)
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Whether you want an additional amount withheld.
When you start a new job, you must fill out Form W-4 and give it to your employer. Your employer should have copies of the form. If you need to change the information later, you must fill out a new form.
If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid overwithholding if your employer agrees to use the part-year method. See Part-Year Method in chapter 1 of Publication 505 for more information.
Events during the year may change your marital status or the exemptions, adjustments, deductions, or credits you expect to claim on your tax return. When this happens, you may need to give your employer a new Form W-4 to change your withholding status or number of allowances.
If the event changes your withholding status or the number of allowances you are claiming, you must give your employer a new Form W-4 within 10 days after either of the following.
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Your divorce, if you have been claiming married status.
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Any event that decreases the number of withholding allowances you can claim.
Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason.
After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. See Publication 919, later. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding.
Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Do not give them to your employer.
In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules.
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You accurately complete all the Form W-4 worksheets that apply to you.
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You give your employer a new Form W-4 when changes occur.
But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.
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You are married and both you and your spouse work.
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You have more than one job at a time.
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You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
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You will owe additional amounts with your return, such as self-employment tax.
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Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
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Your earnings are more than $130,000 if you are single or $180,000 if you are married.
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You work only part of the year.
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You change the number of your withholding allowances during the year.
To make sure you are getting the right amount of tax withheld, get Publication 919. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much additional withholding, if any, is needed each payday to avoid owing tax when you file your return. If you do not have enough tax withheld, you may have to pay estimated tax, as explained under Estimated Tax, later.
It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill out your Form W-4 and how to handle problems that may arise.
If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption applies only to income tax, not to social security or Medicare tax.
You can claim exemption from withholding for 2008 only if both of the following situations apply.
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For 2007 you had a right to a refund of all federal income tax withheld because you had no tax liability.
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For 2008 you expect a refund of all federal income tax withheld because you expect to have no tax liability.
Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. The payer can figure withholding on supplemental wages using the same method used for your regular wages. However, if these payments are identified separately from your regular wages, your employer or other payer of supplemental wages can withhold income tax from these wages at a flat rate.
You may have to pay a penalty of $500 if both of the following apply.
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You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.
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You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.
There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.
These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error or an honest mistake will not result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a W-4 penalty.
The tips you receive while working on your job are considered part of your pay. You must include your tips on your tax return on the same line as your regular pay. However, tax is not withheld directly from tip income, as it is from your regular pay. Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay.
See chapter 6 for information on reporting your tips to your employer. For more information on the withholding rules for tip income, see Publication 531, Reporting Tip Income.
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By withholding at the regular rate on the sum of your pay plus your reported tips.
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By withholding at the regular rate on your pay plus a percentage of your reported tips.
The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. Your employer generally must withhold income tax on these benefits from your regular pay.
For information on fringe benefits, see Fringe Benefits under Employee Compensation in chapter 5.
Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your employer can choose not to withhold income tax on that amount. Your employer must notify you if this choice is made.
For more information on withholding on taxable fringe benefits, see chapter 1 of Publication 505.
Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. To qualify as sick pay, it must be paid under a plan to which your employer is a party.
If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. An agent who does not pay regular wages to you may choose to withhold income tax at a flat rate.
However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld. See Form W-4S, below.
If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where you paid all the premiums), the payments are not sick pay and usually are not taxable.
Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. This rule applies to distributions from:
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A traditional individual retirement arrangement (IRA),
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A life insurance company under an endowment, annuity, or life insurance contract,
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A pension, annuity, or profit-sharing plan,
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A stock bonus plan, and
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Any other plan that defers the time you receive compensation.
The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1 year (nonperiodic payments), or as an eligible rollover distribution (ERD). You cannot choose not to have income tax withheld from an ERD.
Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings.
Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.
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Any sweepstakes; wagering pool, including payments made to winners of poker tournaments on or after March 4, 2008; or lottery.
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Any other wager, if the proceeds are at least 300 times the amount of the bet.
It does not matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken into account at their fair market value.
Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. However, you may need to provide the payer with a social security number to avoid withholding. See Backup withholding on gambling winnings in chapter 1 of Publication 505. If you receive gambling winnings not subject to withholding, you may need to pay estimated tax. See Estimated Tax, later.
If you do not pay enough tax through withholding or estimated tax payments, you may have to pay a penalty. See Underpayment Penalty, later.
You can choose to have income tax withheld from unemployment compensation. To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.
Unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to pay estimated tax. See Estimated Tax, later.
If you do not pay enough tax, either through withholding or estimated tax, you may have to pay a penalty. See Underpayment Penalty, later, for information.
You can choose to have income tax withheld from certain federal payments you receive. These payments are:
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Social security benefits,
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Tier 1 railroad retirement benefits,
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Commodity credit loans you choose to include in your gross income, and
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Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et. seq.), or title II of the Disaster Assistance Act of 1988, as amended, that are treated as insurance proceeds and that you receive because:
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Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or
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You were unable to plant crops because of a natural disaster described in (a).
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To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.
If you do not choose to have income tax withheld, you may have to pay estimated tax. See Estimated Tax, later.
If you do not pay enough tax, either through withholding or estimated tax, you may have to pay a penalty. See Underpayment Penalty, at the end of this chapter, for information.
Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. The information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). TINs are explained in chapter 1.
These payments generally are not subject to withholding. However, “backup” withholding is required in certain situations. Backup withholding can apply to most kinds of payments that are reported on Form 1099.
The payer must withhold at a flat 28% rate in the following situations.
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You do not give the payer your TIN in the required manner.
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The IRS notifies the payer that the TIN you gave is incorrect.
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You are required, but fail, to certify that you are not subject to backup withholding.
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The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 210-day period.
See Backup Withholding in chapter 1 of Publication 505 for more information.
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may have to pay a penalty. If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax, later), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when the penalty applies, see Underpayment Penalty, at the end of this chapter.
If you receive salaries or wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. To do this, give a new Form W-4 to your employer. See chapter 1 of Publication 505.
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You had no tax liability for 2007.
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You were a U.S. citizen or resident for the whole year.
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Your 2007 tax year covered a 12-month period.
If you had a tax liability for 2007, you may have to pay estimated tax for 2008.
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You expect to owe at least $1,000 in tax for 2008, after subtracting your withholding and credits.
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You expect your withholding and credits to be less than the smaller of:
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90% of the tax to be shown on your 2008 tax return, or
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100% of the tax shown on your 2007 tax return. Your 2007 tax return must cover all 12 months.
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You are legally separated under a decree of divorce or separate maintenance,
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You and your spouse have different tax years, or
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Either spouse is a nonresident alien (unless you elected to be treated as a resident alien (see chapter 1 of Publication 519)).
| The tax you would have paid had you filed a separate return | ||
| The total tax you and your spouse would have paid had you filed separate returns |
Example.
Joe and Heather filed a joint return for 2007 showing taxable income of $48,500 and a tax of $6,496. Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. For 2008, they plan to file married filing separately. Joe figures his share of the tax on the 2007 joint return as follows.
| Tax on $40,100 based on a separate
return |
$6,455 |
| Tax on $8,400 based on a separate
return |
873 |
| Total | $ 7,328 |
| Joe's percentage of total ($6,455 ÷
$7,328) |
88% |
| Joe's share of tax on joint return
($6,496 × 88%) |
$ 5,716 |
Figure 4-A Do You Have To Pay Estimated Tax?
To figure your estimated tax, you must figure your expected adjusted gross income (AGI), taxable income, taxes, deductions, and credits for the year.
When figuring your 2008 estimated tax, it may be helpful to use your income, deductions, and credits for 2007 as a starting point. Use your 2007 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax. Nonresident aliens use Form 1040-ES (NR) to figure estimated tax.
You must make adjustments both for changes in your own situation and for recent changes in the tax law. For 2008, there are several changes in the law. For a discussion of these changes, see Publication 553, Highlights of 2007 Tax Changes, or visit the IRS website at www.irs.gov.
Form 1040-ES includes a worksheet to help you figure your estimated tax. Keep the worksheet for your records.
For more complete information and examples of how to figure your estimated tax for 2008, see chapter 2 of Publication 505.
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. The following chart gives the payment periods and due dates for estimated tax payments.
| For the period: | Due date: |
| Jan. 1* – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| Sept. 1– Dec. 31 | January 15
next year** |
| *If your tax year does not begin on January 1,
see the Form 1040-ES instructions. **See January payment, later. |
|
You do not have to make estimated tax payments until you have income on which you will owe the tax. If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. You can pay all your estimated tax at that time, or you can pay it in installments. If you choose to pay in installments, make your first payment by the due date for the first payment period. Make your remaining installment payments by the due dates for the later periods.
| If you first have income on which you must pay estimated tax: | Make a
payment by:* |
Make later
installments by:* |
| Before April 1 | April 15 | June 15
Sept. 15 Jan. 15 next year |
| April 1–May 31 | June 15 | Sept. 15
Jan. 15 next year |
| June 1–Aug. 31 | Sept. 15 | Jan. 15 next year |
| After Aug. 31 | Jan. 15
next year |
(None) |
| *See
January payment,
and
Saturday, Sunday,
holiday rule under When To Pay Estimated Tax, earlier. |
|