Federal income tax estimates may be required

If the bulk of your taxable income is from wages, your tax liability is probably being covered by withholding from your paychecks.  However, if you have income that is not subject to withholding, you may need to pay quarterly tax estimates.

Many taxpayers who switch from being an employee to being self-employed find out about the quarterly estimate requirements after it is too late.  Also, if you have acquired income-producing property, you may have a tax increase that is large enough to require quarterly estimates.  Quarterly payments may be necessary even though taxes are being withheld from your wages or retirement income.

If you fail to pay required income tax estimates on time, the results may well be a penalty plus interest.  Here are the rules.

General rule.  The general rule is that at least 90% of your income tax must be prepaid either by withholdings or by estimated tax payments.  If you fall short of that, you may be able to avoid penalties if you meet the "safe harbor" rules.

Safe harbor rules.  Taxpayers with adjusted gross income (AGI) of $150,000 or less can avoid underpayment penalties by prepaying an amount equal to 100% of last year's tax liability.  To avoid penalties on their 2002 tax returns, those with AGI of over $150,000 must prepay 112% of their 2001 tax liability.

Due dates.  The first quarterly payment for 2002 was due on April 15.  The second payment is due on June 17, and the third is due on September 16.  The final 2002 payment is due on January 15, 2003.