Help me with paying estimated taxes

[TroutMan]

My employer withholds taxes for me, so I’ve never had to worry about paying estimated taxes. But now I’ve been issued a taxable stock grant, so I need to pay estimated taxes to avoid a penalty.

The grant was effective October 1, so it looks to me like the estimated taxes are due January 15. Am I reading that right? Everything I can easily find is aimed toward people who pay estimated taxes throughout the year, not for one-time events like this.

(Just looking for opinions, you are not my lawyer, tax advisor, CPA, etc.)

[dolphinboy]

It’s seems you have that right, but I would check with a tax professional if you have any doubts in your mind.

[Bone]

Not necessarily. Depending on the rest of your situation, estimated taxes are only due if your regular withholdings won’t place you under one of the safe harbor provisions. If this is a one time event, you are likely covered and wouldn’t have to pay estimated tax. From here:

If you don’t pay your tax or you pay an insufficient amount of tax through withholding, you might also have to pay estimated taxes. If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. For more information, refer to Publication 505, Tax Withholding and Estimated Tax.

Given the limited info, I would think the most likely provision you’d fall under the 100% of tax from the prior year unless your W-2 income situation has decreased from prior year. If the stock grant is small, you may also fall under the current year 90% rule.

[pulykamell]

@Bone

Given the limited info, I would think the most likely provision you’d fall under the 100% of tax from the prior year unless your W-2 income situation has decreased from prior year. If the stock grant is small, you may also fall under the current year 90% rule.

This would be my read, too. I’m self-employed, but as long as I pay 100% of the taxes I paid last year on my estimated for this year, any taxable windfall can get settled up at normal tax time. So, as long as you’re paying at least as much tax as you did last year, I believe you should be fine, but always check with a tax professional.

[Bone]

To clarify - This is for fed purposes only, however most states have similar provisions. You’d still owe whatever you owe come tax time. The safe harbor provisions only eliminate any potential penalty for underpayment of estimated taxes.

You can also address this by increasing your withholding by your employer. If there is sufficient time left in the year such that your withholdings from your paycheck can be increased to cover the estimated tax payment shortfall, that would work too. I typically do an assessment in the middle of the 3rd quarter for this purpose.

[TroutMan]

I ran the numbers, and I’m stuck paying some estimated. I keep my withholding about as small as I can without paying a penalty, so even though this event is fairly small, it still pushes me over by $1-2K.

[PastTense]

For an alternative:

The installment payments are due on April 15, June 15, September 15 and January 15 of the following year. You can skip the final payment if you will file your return and pay all the tax due by February 1.

Estimated Taxes: Common Questions