• Interest income must be reported on your taxes.tax forms image by Chad McDermott from Fotolia.com
  
  The Internal Revenue Service (IRS) enforces the rules for federal income taxes, which includes interest income. Interest refers to money paid to you for letting someone else use your money. When you put money in a savings account at a financial institution, you usually receive a small percentage payment as interest because you effectively lend the money to the bank while it remains in your account.
  
  

Income

• The IRS counts interest earned on savings accounts as taxable income, no matter how much or how little you earn. For example, even if you earn only $15 of interest on your savings account, you must still count that as taxable income. However, savings account interest counts as unearned income, which means that you do not have to pay self-employment taxes on the interest earned.
  
  

Reporting Rules

• When you have interest income exceeding $10 from any financial institution, that financial institution will send you a form 1099-INT that lists the amount of interest you were paid. The taxable amount will be listed in box 1. Even if your financial institution fails to send a form 1099-INT, you must still report the income. If you have less than $1,500 of interest, you can simply include the interest income as part of your total taxable income. If your total interest income exceeds $1,500, you must file Schedule B along with your tax return. This tax form requires you to document the source of your interest income.
  
  

Estimated Payments

• The IRS does not require your financial institution to withhold money from your interest payments for income taxes. For most people, the interest income does not impact their taxable income enough to force them to make estimated tax payments to avoid under-withholding. However, if your interest income increases your tax liability to the point that your tax withholding does not cover at least 90 percent of your taxes due, you must make additional estimated tax payments during the year. These payments must be made at least quarterly and will prevent you from being charged with interest and penalties on your taxes due.