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 2024.
If your 2023 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2024 or 110% of the tax shown on your 2023 return to avoid an estimated tax penalty.
Withholding Tax in IRS
If you are an employee, your employer probably withholds income tax from your pay. Tax may also be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the IRS in your name.
Estimated Tax
If you don’t pay your tax through withholding, or don’t pay enough tax that way, you may have to pay estimated tax. People who are in business for themselves will generally have to pay their tax this way.
Also, 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.
Credit for withholding and estimated tax. When you file your 2023 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 2023. Also take credit for any excess social security or railroad retirement tax withheld.
If you didn’t 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.