I filed 2010 Fed and State returns, the reports my tax consultant gave me has Fed and State estimated tax vouchers for 2011.

I'm employed, and most of the income is the salary, though there is a bit from rental property. In 2010 I sold some stock options and ESPP, hence I owe some money (>$2000) to IRS (which I paid with the return). Previous years, I got the refund, so tax withheld is more than what I owe.

My question is can I adjust my tax withholding at payroll (file a new W-4), and not pay IRS/State the estimated tax as per vouchers? Or is it mandatory to pay IRS/State as per vouchers.

As per my tax consultant, I can do more tax withhold at payroll and not pay estimated tax. Want to double check before I make that change and not send estimated tax to IRS/state.

As per IRS http://www.irs.gov/businesses/small/article/0, id=110413,00.html
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If you receive salaries and wages (TRUE IN MY CASE), you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.

* You had no tax liability for the prior year (NOT TRUE IN MY CASE)
* You were a U.S. citizen or resident for the whole year (TRUE IN MY CASE)
* Your prior tax year covered a 12 month period (TRUE IN MY CASE)
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The above 2 paragraphs confused me a bit, the first para says I do not need to pay, and as with second paragraph I do not meet the first bullet point.

If making new W-4 to withhold more taxes at payroll work for IRS, does the same work for State of California as well? Please suggest.

Thanks in advance.

If you feel that the amount of withholding that your employer is taking from your wages is not sufficient to cover what you think will be your tax bill for 2011, then you can do one of two things:

1. Either raise the amount of withholding by your employer, by filing an updated W4 at work, or
2. Paying estiated taxes each quarter.

The trick here is that you don't want to pay too much either through withholding or estimated payments, but you also don't want to pay too litlle or you may get socked with intereste charges for underpayment.

My advice is that if you think the income that causes you to have to pay more than standard withholding is lilkely to be spotty or erratic, then it's best to file quarterly statements. That way you can easily adust the amount each quarter to match your income stream. But if you'd rather not be bothered thinking about this each quarter, then adjusting your W4 once/year may be more convenient for you. It's really up to you.

As for the state of CA - yes, the same rules apply. You can ask your employer to withhold aditional taxs from your wages, or you can file estimated tax payments each quarter. Again, the choice is yours.

Thanks ebaines for the explanation.

1. You mentioned "file quarterly statements" - are these 1040ES
2. Can I skip first 2 quarters of the year and file only 3rd or 4th quarter, I may have fair idea on the tax status by then.

Or perhaps in 3rd quarter, I can increase the amount of withholding since I know I will be in boarder line.

What is the possibility of paying penality wth the above options if I end up owing more than $1K for 2011?

Thanks for your advise.

subsrvm - please do not use the "comment" boxto ask a followuop up question - use the "answer" box instead.

1. Yes - 1040ES is the estimated tax payment form.
2. You can always change the amount you pay as long as it is reasonably accurate each quarter. I wouldn't skip the first two quarters if you are reasonable certain that you will have to pay estaimed tax during the year, but rather try to even it out. It's a bit of a guessing game, but the IRS does give you some leeway. As long as you either (a) have paid at least 90% of your total tax bil through withholding and estimated payments, or (b) paid as least as much as last year's total tax bill, then there will be no inerest or penalties assessed for underpayment.