In response to the fact that an unprecedented number of Americans are currently claiming unemployment benefits, the IRS has issued a reminder that these benefits are fully taxable. However, the IRS reminds taxpayers that withholding is completely optional. Taxpayers can elect to have a flat 10% withheld from their unemployment compensation and paid over automatically to the IRS. For more information on the rules for making estimated payments, visit Tax Facts Online.

Must a taxpayer make estimated tax payments and what is the penalty for failure to make a required installment payment?

Taxpayers are generally required to pay estimated tax if failure to pay would result in an underpayment (see below) of federal income tax for the current taxable year.¹ The computation of estimated tax for the tax year includes the alternative minimum tax, additional Medicare tax, net investment income tax, and self-employment tax (see Q 767 and Q 774, respectively).² An underpayment is the amount by which a required installment payment exceeds the amount, if any, paid on or before the due date of that installment (due dates are April 15, June 15, September 15 of the current tax year and January 15 of the following tax year).³ The required amount for each installment is 25 percent of the required annual payment.⁴

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