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Thread: paying more, estimated quarterly

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    God/dess shasta's Avatar
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    Default paying more, estimated quarterly

    Hi I would love your educated advice here. This is the first year I am paying this way. I was fined for not paying quarterly last year, I was ignorant that I could not pay at the end of the year. I found out I needed to pay after the first payment was due. My accountant told me to just skip that one because I bought a house this year and she thinks I won't owe as much. I do think I will owe more than 3 payments worth. Can I add extra to a payment? More than it says on the voucher? I want to avoid a penalty. Thanks.

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    Default Re: paying more, estimated quarterly

    well, if you already missed it, it's kind of like putting the toothpaste back in the tube.

    Just be sure that your total estimates are about what you really owe.

    One thing you could do is before your Jan 15th one is due, figure out exactly what you'll owe. I like the 4th quarter payment for that reason...because you know what you made the previous year, you can approximate your deductions (and if you can't, you can get software that will help you figure it out) and you can make that payment whatever you want to offset what you underpaid through the year.

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    Default Re: paying more, estimated quarterly

    to answer your questions, I need to make some assumptions to start with.

    Assumption one is that your accountant has used his tax return preparation program to run off some 1099-ES estimate tax payment voucher forms for you with some pre-calculated amount already filled in based on your tax liabilities for last year.

    Assumption two is that you have significantly higher earnings this year versus last year ... which is the reason you suspect that the pre-calculated amounts aren't adequate.

    Assumption three is that in your discussion about the 'first' payment you skipped, you're referring to the June 15th estimated tax due date.

    Assumption four is that you didn't apply any of your 2007 1040 tax return payment last April towards 2008 estimated taxes, i.e. the amount of money that you sent to the IRS along with your tax return squared you with 2007 taxes but made no provision for 2008 taxes.

    if all of my assumptions are true, then ...

    when the upcoming september 15th estimated tax due date rolls around, you actually owe estimated taxes on all 2008 income earned between January 1st and September 1st. This amount is something like 25% to 35% of your total gross income for this period. This amount is also much higher than the pre-printed amount on the 1040-ES forms that your accountant prepared for you.

    If you go to you can download and print out the whole 1040-ES package from the IRS website. Then you can fill in any amount you choose on Voucher 3 ... due on September 15th. Write the check to the IRS, throw the filled out Voucher 3 along with the check into an envelope, and there you go !

    The 1040-ES package has a whole bunch of mumbo jumbo calculations to try and arrive at the correct amount of estimated tax. Unfortunately, this isn't very accurate for dancers or other self-employed people. To take a fair shot at a correct amount, first figure out how much money you earned between January 1st and September 1st i.e. your 'gross income' to date.

    Next calculate your Self-Employment tax which will be 15.3% of your 'gross income' to date irregardless of any other details (assuming that your 'gross income' hasn't already exceeded $102,000, the social security ceiling for 2008 )

    Next go to the 2008 tax rate schedules that are part of the 1040-ES package. Since your 'gross income' is based on 9 months, you'll need to multiply it by 12 / 9 in order to arrive at a guesstimated income level for the whole year. Pick the tax rate schedule entry that fits your own situation (i.e. single ?). Plug in your guesstimated income level for the whole year to come up with the guesstimated income tax amount due for the whole year. Then multiply that amount by 9 / 12 to arrive at an amount for estimated income taxes covering the first 9 months of 2008 only.

    Add together the dollar amount of the 15.3% self-employment tax and the dollar amount of the [ (guess) $4481 * 25% of $15000 or whatever] * 9 / 12 . This is the amount that you need to send to the IRS to cover your estimated tax liability for January to September of 2008.

    In theory, the IRS could hit you with penalties and interest on the April 15th estimated tax underpayment for income earned between January 1st and April 1st, and also hit you with penalties and interest on the June 15th estimated tax underpayment for income earned between April 1st and June 1st. But if you get 'caught up' in September, the IRS may let this issue slide (or not notice it existed).

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    Default Re: paying more, estimated quarterly

    No, I paid the June 15th payment. I missed the one in April?

    I do not get 1099s from my club in Tucson.

    I think I will just get "caught up" in September, Thanks.

    Emily, that is a good idea, catching up in January.

    I am also putting 25% in a SEP IRA. I am still going to add a bit to my payment, but the tax deferred SEP really helps.

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    Default Re: paying more, estimated quarterly

    wait not to threadjack but why cant you just pay at the end of the year? why do you have to pay quarterly?

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    Default Re: paying more, estimated quarterly

    At a regular job, your employer would withhold estimated taxes for you...but if you're self employed that doesn't happen, so you have to do it on your own every quarter.

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    Default Re: paying more, estimated quarterly

    Boy, I would ask the accountant some more questions. Having a big deduction doesn't mean you can skip an estimated. And even if your payments in the last three quarters cover your liability for the whole year, you could face a penalty for late payment of the first quarter amount. Depends on your income stream through the year.
    Maybe the advice to skip was carefully thought through and based on some good income projections, but it sounds like it might just have been sloppy. Penalties aren't huge, but I wonder how much attention you are getting.
    Yes, you can pay more in your later payments to make up the shortfall, and you also can pay now. The penalties are calculated based on days late, so you can reduce them by making an extraordinary payment mid-quarter, and not waiting for Sept 15.

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    Default Re: paying more, estimated quarterly

    Quote Originally Posted by i.breathe.in View Post
    wait not to threadjack but why cant you just pay at the end of the year? why do you have to pay quarterly?
    Also, you don't want to have to write THAT huge of a check to the IRS in April. I did it this year. It was painful and only for half a year.

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    Default Re: paying more, estimated quarterly

    wait not to threadjack but why cant you just pay at the end of the year? why do you have to pay quarterly?
    It's all about the fact that taxes are owed on income as soon as that income is earned - a.k.a. the 'time value of money'. For 'employees', this means that the 'employer' withholds and sends to the IRS an estimated tax payment on behalf of the 'employee' for every pay period. Self-employed people also owe taxes to the IRS as soon as the money is earned, but the IRS is content to allow quarterly estimated tax payments.

    As to 'missing' the April 15th estimated tax payment on income earned between January 1st and April 1st, consider some financial math. Say that the amount of income earned was $15k, and the amount of taxes due was $3000 on April 15th. On April 16th the IRS considers the non-payment of the $3000 owed as the equivalent of taking out a $3000 'loan' from the government at an interest rate of around 8% (currently). Additionally, the government can also impose 'late fees' of 1/2% per month. So if the April 15th 2008 payment doesn't actually get made until April 15th 2009, the original $3000 owed will grow to $3000 plus $240 interest plus $360 'late fee' ... providing that the IRS chooses not to impose any additional penalties for 'failure to file' etc. This works out to be a 20% simple interest rate being charged by the IRS on that $3000 'loan' !

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    Default Re: paying more, estimated quarterly

    I've made a big catch-up with my last payment and it didn't affect me all that much.

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    Default Re: paying more, estimated quarterly

    Hi:

    For underpayment of estimated taxes, the penalty you owe is interest based on the number of days you're late. For Q2 '08 it was 6% PA, and for Q3 it's down to 5%. There are no further penalties, as long as you pay the total amount due by 4/15/09. Effectively, this is a loan from the govt. at a reasonable rate. However, the interest is not deductible, so it's really equivalent to about 8-9% deductible. You can make payments at any time, and stop the clock on the penalty. It is crucial though that you pay the total tax due by the filing deadline next April. If you fail to pay, or file timely, the penalties are much more painful.

    Good luck.

    James

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    Default Re: paying more, estimated quarterly

    thanks for clarifying!

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