Why would one estimate income taxes?

Answer 1

The requirements for paying taxes are fairly explicit. They are payable on earnings, (even anticpated ones) as made and a return is filed annually. The return is due on 4/15, but the payments are due earlier. (Interestingly, the first estimated payment for the current year is due the same day). You must make payments on you estimated earnings through the year or you will pay a penalty and interest on the amounts not paid timely. The calculation of how much should have been paid is accomplihed mechanically. That is, at the filing, the amount of tax you should have paid is known, and simplified (applying certain guidelines and safeharbors - like 90% of total by year end), the IRS would expect to see 1/4 of that amount paid each quarter of the year, or the penalty and interest is appled. Yes, there are situational reasons that require substantiation and MAY apply to prove the amount was not able to have been determined correctly early in the year and an underpayment resulted. Payments made through withholding of employee salary are considered estimated payments, and have certain other qualifying benefits. All explained, in plain language, yet excruciating detail: http://www.irs.gov/publications/p505/index.html