Question

Which of the following taxpayers would not be required to make estimated payments?

a. an employee who works at a local department store with appropriate withholding and no other income
b. a wealthy individual whose earnings are from corporate dividends
c. a self-employed individual whose tax liability for the year is expected to be under $2,000
d. a car mechanic who is self-employed and earns $50,000 a year

Answer 1

The correct answer is A. An employee with proper withholding and no additional income would not be required to make estimated tax payments because their employer already deducts taxes regularly through withholding tax, which usually covers their tax liability for the year.

Step-by-step explanation:

Employees typically have taxes withheld from their paychecks by their employer throughout the year, which is often sufficient to cover their tax liability, especially if they do not have additional sources of income. This system of withholding tax acts as a pay-as-you-go method, making it less likely for employees with simple financial situations to need to make estimated payments.

On the other hand, self-employed individuals and those receiving income not subject to withholding, such as corporate dividends, usually have to make estimated tax payments since they do not have withholding and must account for taxes like income tax and self-employment tax. If a self-employed individual expects to owe less than $1,000 in taxes after subtracting withholdings and credits, they do not need to make estimated tax payments, which is the case for option c. However, this is only true if their tax liability is under $1,000, not necessarily if it's under $2,000, as the question is vague on the specifics of withholding and credits for this individual.