If you are required to make estimated tax payments, how much do you have to pay?

Your total tax payments during the year (that is, before January 15^th of the next year) must add up to the lower of these two amounts: (1) 90 percent of the tax you owe for the current year, or (2) 100 percent of the tax you owed for last year. (If your 2001 adjusted gross income was more than $150,000, or more than $75,000 for marrieds filing separately, substitute 112 percent in the preceding sentence.) "Tax you owe for the year" includes federal income tax and any self-employment (SECA) tax due on your business income.

"Total tax payments" includes any tax withholding on any paychecks, investment income, pensions, or any other income you receive (or your spouse receives, if filing jointly). If the difference between any withholding during the year, and the amount computed in the paragraph above is $1,000 or more, it must be made up with estimated tax payments.

The best way to do this is to look at each major item on each tax form and schedule that you filed this year, and make a guess as to whether it will change for next year. If you think there will be a change, estimate what the change will be (for instance if your real estate tax bill on your office will rise by 10%, that will reduce the amount of net income from your business on Schedule C, and increase the amount of itemized real estate taxes deductible on Schedule A).

Then, determine how the cumulative changes will affect your tax bill to arrive at a ball-park estimated bill. From this expected tax bill, subtract any withholding that will be done, and the amount remaining, minus $1,000, is what you need to pay in estimated taxes. Many business owners go through this exercise at least twice a year: around April 15^th, and then again sometime in the third quarter of the year.

The IRS provides a worksheet on which you can make this calculation, as part of the instructions to Form 1040-ES. You can get a copy by calling 1-800-TAX-FORM.

Regular or annualized method. Once you know the total amount of estimated tax payments you'll have to make during the year, there are two ways to compute the dollar amount you must pay for each quarter. The two methods generally used are the regular installment method and annualized income installment method.

The regular installment method works by dividing your total amount of estimated payments for the year by four. On each payment due date, you pay one-fourth of the total tax due for the year. The IRS prefers this method, and it's by far the simplest to use.

If your business is of the type that doesn't receive income evenly throughout the year (for example, you sell surfboards year-round in the Northeast), you may want to use the annualized income installment method to compute your estimated tax payments for each period. Under this method your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

If you elect to use this method, you'll have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your regular individual income tax return. Using this method is more complicated than simply determining your net income for each quarter, and figuring the tax on it. For complete instructions on using this method, talk to your tax advisor or get a copy of the IRS's free Publication 505, Tax Withholding and Estimated Tax.

Corporations are generally required to make installment payments equal to 25 percent of the required annual estimated tax.