In many cases, as long as you pay 100 percent of the previous year's tax, you won’t be subject to the penalty. To avoid this penalty, you can use your previous year’s taxes as a guide. As such, it is possible to underestimate, resulting in an underpayment and penalty.
The estimated tax payment is based on an estimation of your income for the current year. If you have any of theses types of income coming in, then you might need to pay estimated taxes during the year. Earnings from interest, dividends and rent, taxable unemployment compensation, retirement benefits and the taxable part of your Social Security benefits are other examples of income that often does not have tax withheld at the source. Independent contractors and freelancers, for example, typically do not have tax deducted from their pay. Not all taxable income is set up so that taxes are deducted at the source.
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