Quarterly tax filing question

[donheff]

For decades DW and I used accountants for our income tax filings. DW is a partner in a Chicago law firm with earnings in several states, late year bonuses, last minute K1s, etc., and the professional help seemed important. Last year she semi-retired and dropped down to about 10% of her previous income with a fixed monthly draw. Instead of the previous quarterly filings I increased the Federal and DC withholdings on my pension to include her income and self employment (SSA) taxes. It worked fine this year and I was able to do it myself with Turbo Tax.

But here is my question. This year DW is somewhat active on a case. If her level of effort continues she will probably get an end of year bonus that screws up my withholding projections. Will we be able to simply file a single quarterly for the final quarter to make up for the bonus? I had some vague memory that if you use quarterlies you were supposed to file all four. I would just jack up my withholding for the final period to cover the extra tax but her firm tends to do bonuses at the last minute, to late for me to get the increase in.

Edit: nevermind this post. It just dawned on me that if I pay 100% of my 2010 taxes I won't have a penalty. I can't figure out how to cancel this thread or I would do so.

Edit on the edit: see my reply to Martha -- this could just be passing the issue on to 2012. I still need to know if I can file a single quarterly.

[Martha]

Can't she just do withholding on her final bonus? That seems the simple way to do it.

Or, see the down and dirty rules. Publication 505 (01/2011), Tax Withholding and Estimated Tax

[donheff]

Quote:

Originally Posted by Martha Can't she just do withholding on her final bonus? That seems the simple way to do it. Or, see the down and dirty rules. Publication 505 (01/2011), Tax Withholding and Estimated Tax

She can't do withholding at her firm. Partners all file quarterlies as self employed. The only way I can think to "withhold" is via a quarterly. But now I have thought of an issue that my edit above doesn't address. I could get through 2011 without filing a quarterly since we would have withheld 100% of 2010. But what about 2012? I would not want to withhold the full 2011 amount if it included tax on a substantial bonus we don't expect to be repeated in 2012. But what if she gets another bonus in 2012 Now we would be short the 2011 rate and would face a penalty if we didn't make up the difference! So the question remains, can we file a single quarterly?

[Martha]

On the link I gave work out the worksheets. You can use the annualized installment method of estimated taxes to figure out the estimate and pay the last quarter. Hopefully your other quarters required no payments because the withholding you did.

Note from the publication:

You do not have to pay estimated tax if your withholding in each payment period is at least as much as:

One-fourth of your required annual payment, or
Your required annualized income installment for that period.
You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you will owe with your return under $1,000.



The worksheets should tell you the answer.

[PaddyMac]

I file quarterlies for self-employment. I've been under the impression that if you have no income, you have no tax liability so you don't send a check. Although it sounds like your wife does have some small amount of steady income.

If your wife has SE income, I would pay a little estimated taxes each quarter in her name, rather than fiddle with including it on your withholding.

Most years our income is steady but the year we moved house, we had very erratic income. So I paid a little the first two quarters and then bumped it up for the last two quarters. Unfortunately Uncle Same just sees the final number and divides by four, and wants to hit you up for under reporting in the first two quarters. So if you have erratic income (and more at the end) you need to compute it on a separate tax form that splits it out quarterly (so you don't have a penalty for under reporting).

Remember that the idea of quarterly estimated payments is that you are not just paying your total year's estimated tax liability in four quarters. You are paying each quarter for the income you made in the previous quarter (or up to that point).

So on April 15, you are paying taxes for Jan-March income
On June 15, you are paying taxes for Jan-May income (less amount pd in april)
On Sept 15, you are paying taxes for Jan-August income (less amount already pd)
Then only the next year on Jan 15 are you computing based on the entire year, which would include your end-of-year bonus.

In other words, you are not required to pay taxes early in the year on a bonus you receive in December. Plus, the whole idea behind "estimated" taxes is that the IRS doesn't expect small business owners to keep such good books that they know their "actual" quarterly income.

Many self-employed people have no clue how the year is going to go - you might have a quarter with little to no income then a huge job in the next quarter. But if you can prove you are keeping good books and paying taxes only on actual income - rather than estimated income - the IRS will accept that and not charge penalties. At least, that's been my experience.

I'm not an accountant, just passing along what our CPA has told me over the years. But if this is bothering you enough, why not pay for an hour's consulting with a CPA.

[meierlde]

Unless comp fell from 2010 to 2011 one can use the 110% rule to estimate the quarterly tax payment. There is the 100 or 110 (depending on income) safe harbor that says that if you have paid that much there is no penalty even if a large amount is due. So if income did not fall a lot from 2010 to 2011, one can use that safeharbor. Also note that the interest rate on a late payment is only around 2.83 % this year using the fast method.

[mystang52]

I received a very large taxable settlement last November, and paid my estimated tax on that on January 15 as law requires. Turbo Tax has a link, as you do the form, to break out your income by quarter. This method ensures you do not get assessed a penalty.