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Thread: penalty for not paying quarterly estamate

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    Senior Member kat 3322's Avatar
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    Default penalty for not paying quarterly estamate

    a dancer friend of mine who files taxes every year says she does not pay estimated quarterly taxes because the fee is so low its not worth the hastle, she just pays yearly. is the fee a percent or flat fee, does any one know what it is.

    also im a little confused about the first year exemption. ive been dancing since september, and now im coming up on the end of the quarter. the year before i had a relgular job so am i supposed to pay estimated taxes on those earnings? or just on what ive made this quarter(unless the fee is low and then i wont pay the estimate)

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    God/dess Emily's Avatar
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    Default Re: penalty for not paying quarterly estamate

    It's a lot! I think it's like 5-25%, and that's not including interest which is at an unfavorable rate.

    It seems waiting until the end will be even more painful because you have to come up with all that money quickly....unless you are saving it all along, which kind of defeats the purpose.

    It's not that much of a hassle. If you are really lazy and don't want to do the calculations, you could overpay. You send in a check with a tiny form. It's as easy as manking a car payment.

    The first year expemtion is that you don't have to send in the quarterly payments, but I see few reasons why not. I mean, who wants a huge tax bill all at once? You only owe for the time you were self-employed (dancing)

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    Default Re: penalty for not paying quarterly estamate

    Lol, I don't pay my quarterly taxes, but I do end up getting a large chunk back at tax time, so they take everything out of my refund.

    I don't have a form to file, they don't have to worry about it, and I still get a small refund, so I'm happy. Plus I don't have to pay my CPA as much. And it was his idea.
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    Default Re: penalty for not paying quarterly estamate

    Independent contractors who don't pay estimated taxes on time are subject to ...

    #1 - an interest charge which typically runs between 7-10% on the amount of estimated tax money they 'borrowed' from the IRS rather than paying themselves

    #2 - a late payment penalty of 1/2% per month up to a 25% maximum

    #3 - any interest charges and/or penalties due to state/local income tax authorities for non-payment of state/local estimated taxes (varies by state)

    Thus a hypothetical full time dancer who owes say $15,000 in federal taxes, and who pays nothing in estimated taxes, might wind up paying something like $1,000 in interest charges plus $600 in penalties on top of the original $15,000 - not a huge amount, but certainly costly versus the time it would have taken to fill out four estimated tax forms and mail four quarterly checks to the IRS. On the other hand, letting this money sit in a bank account or CD might have earned say $400 in interest to offset the IRS penalties. Basically, paying your estimated taxes and avoiding IRS penalties will be the easiest money you ever earned !

    The so-called first year exemption actually says that estimated taxes must be paid which are either ... 90% of the total amount of taxes due on THIS year's income ... OR 100% of the total amount of taxes that were due on LAST year's income. Thus if you were a student or otherwise had zero income and zero taxes due LAST year this constitutes a first year exemption to having to send in estimated tax payments this year (although I still don't recommend doing so to minimize the amount of cash you'll have to cough up in one lump next April 15th).

    On the other hand, if you had a 'straight job' last year with some income and some taxes due, then your first year exemption does not start from zero - it starts from the amount of money you actually paid in federal taxes last year. Thus if you have not sent in at least that much estimated tax money via quarterly checks you'll be held liable for some interest and penalties.

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    God/dess montythegeek's Avatar
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    Default Re: penalty for not paying quarterly estamate

    Also be aware that state penalties for not filing estimated taxes can be WORSE than the IRS, even though it is less money.

    Also penalties are assessed from the date DUE until PAYED so it is not to late to minimize the damage by paying a lot of what you owe NOW, even though it is right before Christmas.

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    Banned Melonie's Avatar
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    Default Re: penalty for not paying quarterly estamate

    Also penalties are assessed from the date DUE until PAYED so it is not to late to minimize the damage by paying a lot of what you owe NOW, even though it is right before Christmas.
    To put this more graphically, in my previous example the taxpayer owes a total of $15k in income tax on money earned during 2005. Contrary to first glance conclusions, the $15k is NOT due on April 15th 2006. If the earnings rate was more or less equal throughout the year, $3750 was due on April 15 2005, another $3000 was due on June 15 2005, another $4500 was due on September 15 2005, and the last $3750 will be due on January 15 2006. As Monty points out, the interest and penalty clock starts running from these estimated tax deadlines. Thus if you make 'catch-up' estimated tax payments by January 15th versus waiting until April 15th, you'll basically save 40% on penalties and interest. This is because if you 'catch up' on January 15 you'll be 3 quarters delinquent on the April 05 payment + 2 quarters delinquent on the June 05 payment + 1 quarter delinquent on the Sept 05 payment = 6 quarters delinquent in total. In contrast, if you wait until April 06 you'll be 4 quarters + 3 quarters + 2 quarters + 1 quarter = 10 quarters delinquent in total.

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    Senior Member kat 3322's Avatar
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    Default Re: penalty for not paying quarterly estamate

    ok so it seems like obviously i should pay quarterly.

    is there a web site should i go to to find the proper forms to fill out?
    its one for state and one for federal?
    will the form walk me through how much i owe off of what ive made, like with my tax forms from regular jobs where it says(for example) "if youve made over (x) got to step b and multiply by 7%" or do i need another resource to figure this out?
    do i factor in deductions at this point or only in april?

    thankyou guys so much!

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    God/dess montythegeek's Avatar
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    Default Re: penalty for not paying quarterly estamate

    Scroll down to "estimated tax" on this page for all you need from the Feds.

    http://www.irs.gov/formspubs/article...=99236,00.html

    Mass form is at http://www.dor.state.ma.us/forms/inc...lpdfs/1_es.pdf
    instructions are at
    http://www.dor.state.ma.us/forms/inc.../1es_instr.pdf

    The forms are not complicated for the simple reason that they have you either way. If you overpay they get to borrow the money for free, and if you underpay the sock you with a penalty. I try to always overpay by a small amount (like $50-$100)

    Glad to help a fellow Mass-hole.
    PS The Mass DOR still sends me the 1ES every year, even though I stopped being a contractor 3 years ago. Their form letters are harder to read than a calculus book.

    PPS: In case I was not clear, you pay what you estimate the income was after deductions--the burden is on you to be right what those were. If you over estimate the deductions-you will have underpaid, and may owe a year-end bill or a penalty. If you underestimate deductions, you have just overpaid and loaned them money at no interest--they like that.

    I would adopt the technique of adding up the 10-12 biggest deductions and estimate from those and save the piddly-shit for the end of the year to make sure you paid all. A big advantage of doing it every quarter is that you are less likely to lose receipts and forget stuff. I would go to Staples and buy some 8.5x11 envelopes and write stuff on the outside, and put receipts and forms on the inside. Tax programs like Taxcut and Turbo tax also often help you do the next year's estimates, but I would find it easier to use a simple spreadsheet with words in column a, numbers in column b. ALWAYS keep a backup on a floppy!!!-- you never know when the hard disk will crash on you.
    Last edited by montythegeek; 12-22-2005 at 06:12 AM.

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    Senior Member kat 3322's Avatar
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    Default Re: penalty for not paying quarterly estamate

    thank you for the websites. I dont have to send them the receipts right, i just need to keep them as documentation?

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    Default Re: penalty for not paying quarterly estamate

    Quote Originally Posted by kat 3322
    thank you for the websites. I dont have to send them the receipts right, i just need to keep them as documentation?
    yes that's correct keep the receipts yourself in case you are ever audited, and just enter the subtotals by category on Schedule C of your tax return.

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    Default Re: penalty for not paying quarterly estamate

    Here is another aspect of the "I am just going to pay it at the end of the year" debate. If you are tempted to say like the friend in the first post "it's just 1000 bucks for the fine/penalty, well I make that in a week or whatever so it's worth it just not to have to deal with it.

    By not paying your estimated payments, you are drawing attention to yourself/your return, attention that if you had made your payments you may never have gotten, but because you did choose to not make your payments now your return is going to get a second look, when that second look reveals your occupation as 'dancer/entertainer/private contractor" or whatever you put, occupations known for "under reporting/overdeducting" your return now will probably get an even better third look, then if your income seems a little too low or your deductions a liitle too high, the IRS is off to the races investigating you, these days all it takes is a few mouse clicks and they can find out plenty about your finances and spending history.

    On the other hand you make your payments, it's pretty easy, and you save the 1000 bucks and probably avoid that second look to begin with.

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    God/dess Emily's Avatar
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    Default Re: penalty for not paying quarterly estamate

    Quote Originally Posted by phonehome
    "it's just 1000 bucks for the fine/penalty, well I make that in a week or whatever so it's worth it just not to have to deal with it.
    I can't imagine saying this. The things we have to put up with to make the extra $1000 is way worse than filling out some paper and doing calculations. I jsut find it odd that anyone would think so little of money, even in our business. if she's paying income tax, she must be at least somewhat money savvy.

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    God/dess montythegeek's Avatar
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    Default Re: penalty for not paying quarterly estamate

    Quote Originally Posted by Emily
    I can't imagine saying this. The things we have to put up with to make the extra $1000 is way worse than filling out some paper and doing calculations. I jsut find it odd that anyone would think so little of money, even in our business. if she's paying income tax, she must be at least somewhat money savvy.
    The way it builds up is by ignoring the problem when it is small--the I'll catch up next time excuse. Then next time comes along and is viwed as just another $150--but it is $150+300 then becomes $150+300+450 then $150+300+450+600 and you are $1500 in penalties before you know it. What looks like 2 or 3 good customers becomes 2 weeks pay.

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    God/dess Bunny's Avatar
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    Default Re: penalty for not paying quarterly estamate

    I am not dancing but I'm a contractor and I had coupons from my CPA to pay an estimated amount each quarter. I paid the first quarter and then the second and third I didn't have it. I am caught up and will pay it all now. I'll let you know how bad it is. I also will be taxed more than last year because I made more and have fewer deductions. I'm dreading getting my taxes done but better late than never.

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