The federal income tax is a pay-as-you-go tax. You must pay taxes as you earn or receive income throughout the year.

There are two methods for paying taxes:

• Withholding
  • If you are an employee, your employer probably withholds income tax from your paycheck.
  • Income received from pensions, bonuses, commissions, gambling winnings, and other sources may also have income tax withheld from the amount you receive.
  • The amounts withheld are paid to the IRS on your behalf.
• Estimated Tax Payments
  • If you do not pay taxes through withholding, or do not pay enough tax through withholding, you may need to make estimated tax payments to make up the deficit.
  • Generally, people who are in business for themselves pay their taxes through estimated payments.
  • Tax on income received from dividends, interest, rents, royalties, and capital gains is generally paid through estimated payments.

If you do not have enough taxes withheld, or you do not pay enough in estimated taxes, you may be subject to a penalty for underpaying your taxes.

The Making Work Pay Credit, new for 2009 and 2010, will automatically reduce withholding for most wage-earners. If, when you prepare your return, you do not qualify for as much credit as you received through reduced withholding, your refund could be smaller or you may even owe tax. This might especially affect those with two jobs, including families where both spouses work. For this reason, you may want to adjust your withholding by filing a new Form W-4 to account for the difference.

The IRS Withholding Calculator can help you determine if your withholding is appropriate for your income, dependents and other tax information.

If your income is low enough that you will not have to pay income tax, you may be exempt from income tax withholding. You may still be subject to Social Security and Medicare tax withholdings. You can claim an exemption from income tax withholding only if:

• For the prior tax year you received a refund, or were entitled to a refund, of all federal income tax withheld because you had no tax liability.
• For the current tax year you expect to receive a refund of all federal income tax withheld because you expect to have no tax liability.

For more information, see IRS Publication 505.