# Estimated Tax Payments **URL:** \ **Category:** Factual Questions\ **Created:** [April 8, 2009, 1:47pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392 "2009-04-08T13:47:26Z")\ **Posts on this page:** 10\ **Page:** 1
**Author:** ![brazil84](https://avatars.discourse-cdn.com/v4/letter/b/8491ac/32.png) [@brazil84](https://boards.straightdope.com/u/brazil84)\ **Post date:** [April 8, 2009, 1:47pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/1 "2009-04-08T13:47:26Z")
I have a “friend” who runs a business with income that varies a lot from month to month. He is trying to figure out how much money to send into the feds on April 15 this year so that next year he can submit Form 2210 and pay little or no penalties. [Note to mods: The worst that will happen if this guy overpays or underpays is that he will get a refund or owe a few hundred dollars in penalties. So this isn’t like asking for medical or legal advice] Anyway, the facts are these: The guy is married with 2 children he can claim as dependents. In 2009Q1, he has had about $24,000 in self employment income. He files jointly with his wife, who had about $14,000 in W-2 income in 2009Q1. The wife had about $2500 withheld in federal income tax; $1000 in social security tax; and $200 in medicare tax. The family gets about $10,000 per quarter in deductions from mortgage interest and property tax payments. ---
**Author:** ![Baracus](https://avatars.discourse-cdn.com/v4/letter/b/2bfe46/32.png) [@Baracus](https://boards.straightdope.com/u/Baracus)\ **Post date:** [April 8, 2009, 5:29pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/2 "2009-04-08T17:29:37Z")
Chapter 2 of IRS [Publication 505](http://www.irs.gov/pub/irs-pdf/p505.pdf) has a worksheet for figuring out your annual payments when your income is not even throughout the year. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [April 8, 2009, 6:01pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/3 "2009-04-08T18:01:23Z")
[Here’s another resource on it.](http://www.fairmark.com/estimate/howmuch.htm) Basically, the way it works for me, since I make all my income from 1099s, is that my estimated tax for 2009 will be my tax liability for 2008 divided quarterly. So, if I owed $20,000 in taxes for 2008 (remember, as self-employed, none of that has been withheld, so I directly pay that to the IRS), my quarterlies will be $5,000 (with the caveat that my adjusted gross income is under $150,000 or $75,000 if married and filing separately. In that case, I have to pay 110%). So, even if I make more next year (and usually, year to year my income grows), as long as I pay 100% of my tax liabilities for the last fiscal year, I’m square with the IRS (keeping in mind the 110% caveat above.) Now, if I think next year is going to be a shit year, I could go through the worksheet, try to figure out what I think my income will be for 2010, then you only need to pay quarterlies on 90% of your current year’s estimated tax. The 90% rule is too confusing for me, and my income is either steady or growing, so I just use the 100% of last year’s tax liabilities to figure out what to pay for the next year, and then top it off with a last payment on April 15. So, on April 15, assuming I make more money this year than last and have a greater tax liability, I need to send the IRS two checks: one to satisfying my remaining tax liabilities for 2008, and one for the estimated tax for Q1 2009. edit: If you do TurboTax, it figures all this stuff out for you. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [April 8, 2009, 6:14pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/4 "2009-04-08T18:14:35Z")
My advice to clients is to make estimated payments equal to one quarter of the tax due (as pulykamell does). This ensures that they don’t get stuck with any under withholding penalties. If their income is higher for this year than last year and they want to save up for the extra taxes, I recommend they put additional money into a savings account or a short-term CD. Generally, 30% to 40% of net income is a good number (15% self-employment tax, plus 15% to 25% for income tax). By keeping it in savings, they can earn a little interest on it. ---
**Author:** ![brazil84](https://avatars.discourse-cdn.com/v4/letter/b/8491ac/32.png) [@brazil84](https://boards.straightdope.com/u/brazil84)\ **Post date:** [April 8, 2009, 9:36pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/5 "2009-04-08T21:36:54Z")
> [@Baracus](#): > > Chapter 2 of IRS [Publication 505](http://www.irs.gov/pub/irs-pdf/p505.pdf) has a worksheet for figuring out your annual payments when your income is not even throughout the year. Yes, my “friend” toiled with Pub 505 all morning but is not sure he understood what he was doing or did the calculations correctly. ---
**Author:** ![brazil84](https://avatars.discourse-cdn.com/v4/letter/b/8491ac/32.png) [@brazil84](https://boards.straightdope.com/u/brazil84)\ **Post date:** [April 9, 2009, 9:32am UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/6 "2009-04-09T09:32:33Z")
> [@pulykamell](#): > > [Here’s another resource on it.](http://www.fairmark.com/estimate/howmuch.htm) > > Basically, the way it works for me, since I make all my income from 1099s, is that my estimated tax for 2009 will be my tax liability for 2008 divided quarterly. So, if I owed $20,000 in taxes for 2008 (remember, as self-employed, none of that has been withheld, so I directly pay that to the IRS), my quarterlies will be $5,000 (with the caveat that my adjusted gross income is under $150,000 or $75,000 if married and filing separately. In that case, I have to pay 110%). > > So, even if I make more next year (and usually, year to year my income grows), as long as I pay 100% of my tax liabilities for the last fiscal year, I’m square with the IRS (keeping in mind the 110% caveat above.) Now, if I think next year is going to be a shit year, I could go through the worksheet, try to figure out what I think my income will be for 2010, then you only need to pay quarterlies on 90% of your current year’s estimated tax. The problem is that this person’s income can vary wildly from quarter to quarter and year to year. So he has no idea how much money he will make in 2009. Moreover, 2008 was a big year for him so it would be very very expensive to make quarterly payments based on 2008. Can Turbotax computer quarterly payments using the annualized formulas in Pub 505? ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [April 9, 2009, 3:10pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/7 "2009-04-09T15:10:02Z")
> [@brazil84](#): > > The problem is that this person’s income can vary wildly from quarter to quarter and year to year. So he has no idea how much money he will make in 2009. Moreover, 2008 was a big year for him so it would be very very expensive to make quarterly payments based on 2008. > > Can Turbotax computer quarterly payments using the annualized formulas in Pub 505? Good question. The version I have automatically computes based on the previous year–I don’t know if there’s an option to walk you through the worksheet. Well, your friend then either needs to figure out that worksheet on his own and put in 90% of expected 2009, or base it on 2008, and get it back as a refund next year if he overshoots. Now, what I don’t know is how the IRS deals with this 90% stuff. What if you unexpectedly make more than you thought you were going to? Do you dump extra money in certain quarterly payments to make up for this? What if your 2009 ends up being about the same or better as your 2008, but you honestly expected, say, a 20% decrease in your taxable income? How do you prove your 90% payments were based on an honest appraisal of you 2009 business prospects and not just a way to keep extra money in your pocket until April 15, 2010? I personally don’t know, and generally don’t want to find out from the IRS, so I just play it safe, pay the 100% divided by four quarters from last year, and I don’t have to worry about the feds bothering me for that. But my income doesn’t vary that wildly. If I expected to make, say, 25% less taxable income next year, I’d start looking at the worksheet. Long post short, in your friend’s situation, I would probably just consult and accountant or tax professional. The couple hundred bucks is worth the piece of mind. But, if he wants to tackle it, just go step-by-step through the IRS worksheet given in form 505, like you would any other tax form. I would also document all my work/numbers in figuring out the worksheet, along with the worksheet itself, to save it in my 2008 tax files. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [April 9, 2009, 3:18pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/8 "2009-04-09T15:18:59Z")
Apparently, Turbo Tax does (or did) have a separate Estimated Taxes program, [but the reviews for it were rather disappointing](http://www.amazon.com/TurboTax-Estimated-Taxes-Quarterly-Income/dp/B000BKOVZO): > [@](#): > > I’m a tax professional who specializes in working with self-employed people. I teach small business tax classes and one of the hardest things to teach others is how to make quarterly estimated tax payments (how to know the amount to send in). I figured this software would really help students but that’s not true. The only thing this software does right now is tell you that you can avoid penalties by sending in the same amount as your tax liability was last year. I also found an online [tax estimator from Turbo Tax](http://www.estimatedtaxes.com/Estimator/welcome.do), but they are not taking any new customers. So, me, yeah. I’d be looking at a tax professional. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [April 9, 2009, 4:09pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/9 "2009-04-09T16:09:54Z")
> [@pulykamell](#): > > Now, what I don’t know is how the IRS deals with this 90% stuff. What if you unexpectedly make more than you thought you were going to? Do you dump extra money in certain quarterly payments to make up for this? What if your 2009 ends up being about the same or better as your 2008, but you honestly expected, say, a 20% decrease in your taxable income? How do you prove your 90% payments were based on an honest appraisal of you 2009 business prospects and not just a way to keep extra money in your pocket until April 15, 2010? I personally don’t know, and generally don’t want to find out from the IRS, so I just play it safe, pay the 100% divided by four quarters from last year, and I don’t have to worry about the feds bothering me for that. But my income doesn’t vary that wildly. If I expected to make, say, 25% less taxable income next year, I’d start looking at the worksheet. I think the confusing thing for most people is that estimated have two functions. One is actually paying for the tax you owe. The other is avoiding penalties. If all you’re worried about is paying the tax you owe, then send in whatever you feel like. The IRS doesn’t care in that regard - whatever you send in gets credited to you on your return. However, the IRS can impose penalties if you don’t send enough. The 100% and 90% rules are just two different ways of getting you off the hook. The 100% rule is based only on last year and thus is a good one to use if you want to set up payments at the beginning of the year and not have to think about them again. You should not use the 90% rule at the beginning of the year based on your estimates of income. Rather you should use it only if you are calculating your income and expense quarterly. Thus, a calculation of income for Jan-Mar will give you an estimate of what to deposit on Apr 15. In June, you re-evaluate your income and expense, and again in September and December. There’s no issue of “Oops, I thought I would make less, but I didn’t” because you should be basing payment son what you did make. If you make the payments that way, you’ll always have deposited the 90% you need. Many corporations do just this, and they do it right because they have a team of accountants with nothing else to do. Furthermore, if the IRS tries to assess them for not making even quarterly payments based on the 100% rule, they can prove that their income fluctuated through the year in accordance with their payments. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [April 9, 2009, 4:20pm UTC](https://boards.straightdope.com/t/estimated-tax-payments/492392/10 "2009-04-09T16:20:03Z")
Thanks! I always wondered how exactly this worked. So the payments aren’t symmetrical then, you pay 90% of what you really owe for that quarter, but have to do a bunch of accounting (basically, like doing your taxes four times a year) to figure it out.