Estimated Taxes

[Fireup2020]

I have been researching this topic - and I think I should be paying estimated taxes. Estimated Taxes

I am a W2 Employee, both state and federal (reg job and reserve). I also am an independent consultant with Mary Kay (but not in/corporated in any form) and use this for multiple deductions. Not enough regular deductions to itemize, so take I the std. deduction.

Here's the kicker for '07: I also will have between 15 and 25K in 1099 "income" from several mini - self employment businesses (tax prep and organizer income)

As a result, I am trying to discern if I should make estimated tax payments (ugh! ) - it appears I could be hit with a penalty - even if I end up with a refund - or pay my entire tax bill next spring.

Thanks for your input!

[pfpelican]

You could just change your withholding to cover the excess income....that way you'd come out right in April. That is, figure out what you'll make total, what tax will be due, then adjust your withholding to have enuf. You'd have to do most of that anyway with estimated payments.

[Martha]

As the publication says:

You must pay estimated tax for 2007 if both of the following apply.

1. You expect to owe at least $1000 in tax for 2007 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of;
   • 90% of the tax to be shown on your 2007 tax return, or
   • 100% of the tax shown on your 2006 tax return. Your 2006 tax return must cover all 12 months

So, if you can increase your withholding to at least the amount you paid last year in taxes (I do believe it is 110% of what you owed last year for certain high income people), you should be ok.

[FIRE'd@51]

There is a "safe harbor" rule that says so long as your total paid in (W2 withholding plus estimated payments) is at least 100% (110% if your income is over 150K) of last year's tax liability you will not be penalized, regardless of your ultimate tax liability.

Sorry, I see Martha already answered the question while I was typing. This software doesn't seem to tell you that someone else posted while you were typing the way the old software did.

[Martha]

Yeah, I think three of us answered at once.

[BUM]

Paying federal and state estimated taxes is like putting money in the bank - albeit interest free. Think of it as peace of mind. Sooner or later you'll owe it especially if your peripheral business incomes do well. Might as well plan for success.

I've been caught short more than once. So now I make a contribution when I can, and I seldom if ever take the refund. I hate to pay taxes but I hate IRS surprises even more

[skyline]

The advice in the prior posts are good - but I have a follow-up question: It seems that the penalty charged by the IRS isn't all that high. I paid underpayment penalties for 2006, and it was only a little over 4% of the total amount underpaid (and I underpaid by a lot). If you assume your underpayment was spread out evenly through the year, that's only approx an 8-9% annual 'fee', or just about the typical SP500 return. Now, I realize that a guaranteed fee outweighs an equivalent variable average gain, but the net of this was that the penalty didn't seem to be all that big a deal.

Did I get lucky in my penalty? Have others been hit with higher penalties? I'm curious as I decided not to bother changing my withholdings for 2007 based on my calculations for 2006 - but if there is potential to pay significantly higher fees, I may need to revisit that decision...

[scrinch]

Quote:

Originally Posted by FIRE'd@51 There is a "safe harbor" rule that says so long as your total paid in (W2 withholding plus estimated payments) is at least 100% (110% if your income is over 150K) of last year's tax liability you will not be penalized, regardless of your ultimate tax liability.

This is only true if you make even payments throughout the year. If you make one estimated payment in December, even if the total withholding plus estimated payment is more than your total tax liability, you can still get hit with charges for interest on the estimated payments you didn't make in previous quarters.

[LOL!]

Quote:

Originally Posted by scrinch This is only true if you make even payments throughout the year. If you make one estimated payment in December, even if the total withholding plus estimated payment is more than your total tax liability, you can still get hit with charges for interest on the estimated payments you didn't make in previous quarters.

The beauty of contributing through your W2 income is that tax withholding is counted as if it was contributed evenly throughout the year. So if you adjust your tax withholding on your Oct-Dec paychecks to cover your liability, then you are golden.

I have some self-employment income and lots of investment income. Since I also have a job, I do not pay estimated taxes. Instead, I run my taxes on the Thanksgiving weekend and then adjust my withholding for my last two paychecks in December. Sometimes I have to withhold most of my paycheck for taxes and live off savings.

Another similar option is to calculate NOW what the safe harbor minimum will be. It could be easy to calculate as mentioned above -- just look at your 2006 tax return. Make sure your W2 withholding hits that safe harbor.

[Free_at_49]

I too am confused about Estimated Tax payments.

For 2006 I paid 100% of the previous year's Federal tax (though 2 payments instead of 4), yet Turbo Tax Online calculated a penalty of $31.

I didn't pay any for North Carolina because their online tax guide said that you don't have to make payments if last year's tax was under $1000. But my 2006 income was higher and tax exceeded $1000, so Turbo Tax Online calculated a penalty of $42.

I could easily schedule 8 payments with online bill-pay but banks refuse to process tax payments. It seems you can't win.

Penalty + Interest seems to be about 4% on the amount owed. How much are you guys paying in penalties per $1000 of income tax owed? All my income is from investments and it's really impossible to estimate, so I'm inclined to pay the penalty at tax time in April.

my numbers:

Federal
Total Tax $2,300.00
Total Payments $1,700.00
Payment Due $600.00
Penalty/Interest $31.00

North Carolina
Tax Payment Due $1,200 .00
Total Payments $0
Penalty/Interest $42.00

[Nords]

Quote:

Originally Posted by Fireup2025 I have been researching this topic - and I think I should be paying estimated taxes.

Well, if you think you should then you're probably already late with your first payment.

Estimated taxes is one of my favorite IRS pubs (http://www.irs.gov/pub/irs-pdf/p505.pdf). With a whole bunch of caveats, you can generally pay the lesser of (1) 90% of what you think you'll owe or (2) as much as you paid last year. But you might also be entitled to enough deductions (especially if you itemize or have business deductions) and tax credits that would get you under the estimated-tax threshold. If you're going to pay as you go (the annualized method) it causes you to file a particularly nasty tax form (2210 AI) that is best handled by TurboTax or Taxcut. So if you're gonna pay estimated taxes via the annualized method then make sure you're planning to use tax software or a very understanding CPA.

You can also sign up for the Electronic Federal Tax Payment System (https://www.eftps.gov/eftps/) and have the money sucked straight from your checking account on the due date. Our 2006 taxes were low enough that 2007's payments are only about $300 each, so I've already set up the payments through Jan 2008. One less thing to worry about in 2007...

[scrinch]

Quote:

Originally Posted by LOL! The beauty of contributing through your W2 income is that tax withholding is counted as if it was contributed evenly throughout the year. So if you adjust your tax withholding on your Oct-Dec paychecks to cover your liability, then you are golden.

I agree. If you can, have all your tax liability withheld this way.

Quote:

Originally Posted by Free_at_49 For 2006 I paid 100% of the previous year's Federal tax (though 2 payments instead of 4), yet Turbo Tax Online calculated a penalty of $31.

I overpaid my 2006 taxes to the tune of $4451, yet I still owed a penalty of $109 because I didn't make payments evenly throughout the year. They deemed that 25% of my tax was due each quarter, and charged interest on that portion of my taxes that wasn't paid up on a quarter-by-quarter basis.

[old woman]

I figure my taxes in about November then have as much as my entire paycheck withheld in December. Then if I am over paid I can just apply it to the next year or have it put in my bank account so I am only giving the IRS about 8-10 weeks interest free loan. Last year my tax was huge because I converted some IRA to ROTH this year will be tiny but because mutual fund income can be unpredictable in December I will over pay but not until December, and only on my W2.

[OAG]

There are several exceptions to paying the penalty BUT you have to fill our the appropriate form in the appropriate places. The form is IRS form 2210. Some of the Tax Preparation programs are a bit foggy on this form. You should not have had to pay the Federal Penalty -- I do not know about the State one.