Comments on: Paying Quarterly Estimated Taxes

By: Tyler

Tyler — Fri, 20 Mar 2009 19:24:12 +0000

Wonderful! Thank you!
On TurboTax I was filling it out and it did not have a field to ask if I had filed taxes last year (I did not) so it automatically gave me a penalty of $120+ for not filing quarterly. I guess I need to call them for help with that matter. At least now I know not to pay that. Also, thanks for the “safe harbor” info. That will be useful because this year I will make 1/3 more than last so I will need to up my quarterly payments this year from only 1/4 of last.
Appreciate the quick response!
Tyler

By: Jim

Jim — Fri, 20 Mar 2009 19:13:15 +0000

The rule is that the IRS gives you one free pass. The first year that you owe, you get a free pass and there are no penalties. If you owe again the next year, you will be penalized unless you paid enough to fall into the “safe harbor” amount. The safe harbor amount is either 90% of what you actually owe, so if you paid $91 in tax and owed $100 for the year, you’re safe; or over 100% of what you paid in tax last year. So if you paid $100 in tax in 2007 and paid $101 in tax in 2008, but owed $120 in tax for 2008, you’re safe because you paid more than what you did in 2007.

By: Tyler

Tyler — Fri, 20 Mar 2009 19:03:05 +0000

OK. I started working last year as a consultant (independent contractor really). I did not know I had to pay taxes quarterly and more importantly when I found out, I was told the first year you are paid that way you can wait till the end of the year, then following years you estimate your quarterly taxes and pay them, then, 4 times a year. Is this right and I should not be hit with fees? Or is it wrong and the $120++ in fees are legit?
Please help! I really want to do my taxes myself, I did not realize the self employment tax would be sooooo high, need to save the money!
Thanks,
Tyler

By: fivecentnickel.com

fivecentnickel.com — Mon, 23 Oct 2006 02:30:33 +0000

Weekly Roundup – 10/20/06

Here’s a quick look at posts that caught my eye over the past week (better late than never)…

JLP has a nice post on building wealth with other people’s money.
Jim gives us the skinny on paying estimated taxes on a quarterly basis.
F…

By: Matt

Matt — Wed, 18 Oct 2006 11:23:40 +0000

I’m with the “hire an accountant” school of thought.

By: Catrijn

Catrijn — Tue, 17 Oct 2006 13:21:20 +0000

Yes, the payment schedule is not actually quarterly – it’s been that way as long as I’ve been doing estimated taxes, and is always the same (april, june, september, january). I don’t find quarterly taxes are much more difficult than annual taxes (and I even annualize some years). If you don’t have major income changes during the year, you’ll basically end up doing your taxes twice (estimated and final); if you need to annualize, it’ll be four or five times. It’s generally not that much extra work, in my opinion – then again, my tax situation is fairly simple. I’d say that if you’ve easily done your own taxes in the past, you probably can still do them yourself. On the other hand, if your annual taxes have been a major pain, it might be time to get a pro to handle it on a continuous basis. Don’t forget that if you’re making quarterly estimated payments to the feds, you’ll probably need to do the same to the state as well.

By: ChrisCPA

ChrisCPA — Tue, 17 Oct 2006 01:06:34 +0000

As with our cash flows, I usually do a tax projection using YTD witholdings & earnings (taxable earnings) along with estimated year-end deductions, exemptions, credits & dividends/cap gains. I’m quite the dork, but I use these numbers to adjust my witholding about every three months – if needed.

I’m an accountant & the software I use for my client tax returns calculates next years estimated payments based on current year figures. Their completed return includes coupons they use to make the estimates on the dates you mentioned – if needed. I’m not quite sure about the significance of the dates…I’ve only been practicing for a couple years…

You are exactly right on all of the info you presented above. Great post!

By: Foobarista

Foobarista — Mon, 16 Oct 2006 19:42:34 +0000

We do the “extra withholding” strategy: figure out in April how much I need to withhold from my paycheck to hit the “safe harbor” and set up my withholding to hit that number. (I do a guesstimate in January so I’m not too far off.)

Also, we set aside 40% of my wife’s self-employment income to a “tax escrow” savings account that we use to pay any extra income taxes, and to finish funding her self-employed 401K and Roth (in years when we can fund a Roth). Any money remaining in the account after this is our “tax refund” and goes into taxable investments.

By: Personal Finance Blog

Personal Finance Blog — Mon, 16 Oct 2006 16:10:28 +0000

Why don’t you change the W-4 form at your employer so they can withhold a bit more. If you have cashflow concerns, usually you can increase salary withholding at the end of the year and still effectively meet your estimated tax obligation. Salary withholding is deemed as equally distributed by quarter regardless of how much is actually withhold by quarter.

By: Gina

Gina — Mon, 16 Oct 2006 13:54:58 +0000

Good post Jim. One thing I’d like to add is that many small businesses (sole proprietors) who have to pay estimated tax payments are better off making annualized payments and these can become a bit tricky to compute, but can also lower the amount you have to pay each quarter, providing you with more cash to invest elsewhere.

By: Bryan C. Fleming

Bryan C. Fleming — Mon, 16 Oct 2006 12:54:18 +0000

Go with the Pros!

Seriously, I “hired” a good CPA for this stuff. Usually what they charge you in fees is offset in what they can save you in Taxes. So their services are essentially free.

When you’re into this working for yourself game you just gotta have someone who can stay on top of it.

My accountant tells me exactly what to pay on the quarterly’s and who to make the checks out too.

I like how you explain the rules though. I never knew how he came up with the numbers.

\- Bryan
http://www.BryanCFleming.com