Tell me about paying quarterly taxes (US)

Factual Questions
1

My wife started a business last year. She only made any money in the fourth quarter, so quarterly taxes weren’t an issue. But this year I believe I will need to pay these. I have a few questions:

  1. Am I required to pay quarterly taxes, or is it just a good idea?

  2. How do I estimate the amount to pay? Do people just pay the SS and Medicare portion, or income tax as well?

  3. Will the IRS send me a receipt when they get the money, or any kind of statement at the end of the year?

  4. Can I pay them electronically? Is there a program like TurboTax or something that will help me estimate the amount and fill out the forms?

Thanks for your help!

2

  1. Generally required once you are on the IRS radar

  2. Use Turbo tax or an alternate to get the estimate-it depends

  3. Nope–keep copies of the checks and your bank statement showing it cleared

  4. TurboTax will generate the IRS quarterly deposit slips with the correct mailing address.
    We send checks, so never looked into the electronic.

3

We pay estimated taxes every quarter (federal and state- in our case, Pennsylvania). I can only respond to a couple of your questions, but the IRS has all sorts of web pages addressing this issue. Here’s what appears to be the main one.

From my experience:

>> 1. Am I required to pay quarterly taxes, or is it just a good idea?

That depends on a lot of things, but if you’re required to do so and don’t (or pay a lesser amount than you should), the IRS can fine you based on the size of your underpayment.

>> 2. How do I estimate the amount to pay? Do people just pay the SS and Medicare portion, or income tax as well?

We just take a SWAG based on the amount of tax underpayment we would have undergone the previous year if we hadn’t paid any estimated taxes. We often adjust what we pay in our last quarterly estimated tax payment based on what actually happened income-wise during the year.

>> 3. Will the IRS send me a receipt when they get the money, or any kind of statement at the end of the year?

No, so keep track of what you paid in estimated taxes each quarter.

>> 4. Can I pay them electronically?

No clue here, I’m afraid. We always send them a check.

4

Didn’t I see this thread header before somewhere?

5

As I understand it, if you pay estimated taxes equal to what you had the pay the year before, there will be no penalty if you underpay (because you made more this year) However, I always try each quarter to pay approximately the right amount of estimated taxes. It is a huge disappointment to have to write a giant check to the IRS in April because you spent the money along the way. I’m speaking from experience here. It sucks.

6

Yeah, I somehow posted this in the Apple Traveling at Light Speed thread accidentally.

Thanks for all the good info folks. If you don’t mind my asking, what percentage do you usually pay every quarter?

7
  1. Here is the flowchart you should follow:

Estimated Taxes flowchart

The summary is that if you will owe more than $1000 and the amount you have withheld from paychecks + credits isn’t at least 90% of your tax bill OR 100% of last year’s tax bill, then you need to pay quarterly.

8

A quick tutorial:

Assuming you are married filing jointly:

Let’s define a couple of terms:

Your “required annual payment” is the LESSER of the following two numbers:

  1. If the Adjusted Gross Income shown on your 2012 return is less than or equal to $150,000,
    then use your total tax for 2012.
    If your Adjusted Gross Income shown on your 2012 return is greater than $150,000, then use your total tax for 2012 multiplied by 1.1.

  2. 90% of your total tax for 2013 as shown on your 2013 return.

Discussion: You can determine the amount in step 1) above just by looking at your 2012 tax return. Determining the amount in step 2) above will obviously take some guessing. For this reason, unless you think your 2013 tax will be substantially lower than your 2012 tax, most people just use step 1.

Next: Your “required quarterly payment” is 25% of the “required annual payment” as defined above.

To avoid a penalty for underpayment of estimated taxes, you have to pay at least your “required quarterly payment” each quarter.

Now, if either one (or both) of you have income tax withheld from your paycheck (or from some other payment). You can count 25% of your total withholding for 2013 against your “required quarterly payment” each quarter. And if that’s not enough to cover your “required quarterly payment,” then just pay the difference.
Let me give you an example:
Let’s say your total joint 2012 tax was $2000 and your 2012 AGI was under $150,000.
You estimate your joint 2013 tax to be $2,000,000.

The lesser of $2000 and $1,800,000 is $2000. So your required annual payment is $2000. Your required quarterly payment is $500.

You have a job and you expect $400 to be withheld from your pay in 2013.
So the amount you have to pay each quarter is $500 minus $100 or $400.

Exceptions:
If your 2013 tax minus your 2013 withholding turns out to be less than $1000, you will not have to pay any penalties.

You may optionally elect to calculate your required quarterly payment by filing Form 2210 and using the Annualized Installment (AI) method. The AI method requires you to calculate your deductions and income each quarter and then to annualize the result in order to determine how much to pay each quarter. The advantage of the AI method is that there is no guesswork involved. You calculate your taxes each quarter and send them in. The disadvantage is that it takes a lot of work and detailed records. But it can save you money if you have an unexpected inrush of taxable income towards the end of the year.

Also note that the so-called quarters are not really 1/4 of the year. The “quarters” range in length from 2 to 4 months.

What if you screw up and underpay? You only pay a penalty on the amount you missed your required quarterly payment by. If your required quarterly payment turns out to be $500 and you pay $499, you will only pay a penalty on $1.

The penalty rate is a variable rate that changes each quarter. The current annual rate is 3%. And it is only charged for the number of days you are late. So you will actually pay much less than 3% of the late amount.

1. Am I required to pay quarterly taxes, or is it just a good idea?
You are not required to pay, but if you don’t meet the minimum required installment each quarter, you will be charged a penalty as described above.

2. How do I estimate the amount to pay? Do people just pay the SS and Medicare portion, or income tax as well?
Calculate your required quarterly installment as described above. Give yourself credit for withholding as described above and then send in the difference. When doing your calculations, include all taxes shown on your tax returns, including SS and Medicare taxes if they are shown on the return.

3. Will the IRS send me a receipt when they get the money, or any kind of statement at the end of the year?
No.

4. Can I pay them electronically? Is there a program like TurboTax or something that will help me estimate the amount and fill out the forms?

Go to https://eftps.gov and sign up for EFTPS (Electronic Federal Tax Payment System). That is the IRS’s electronic payment system for all your taxes. You can pay from any checking account at any US bank. It takes a couple of weeks to get registered since they have to send you a PIN number via US Mail. EFTPS is free.

Or if you have a Mastercard or Visa that pays at least 1.89% in rewards, pay your taxes at payUSAtax.com. payUSAtax charges a 1.89% service fee for MC and Visa payment.

There’s really no form you have to fill out for your estimated tax payments. If you pay electronically, you don’t have to submit a form. If you pay by mail, you submit a voucher with your name, address, SS number, and the amount you are paying written on it. (There is a worksheet attached to the voucher to assist you in estimating your 2013 tax, but you do not submit that to the IRS.)

Turbotax can assist you. It will take your 2012 tax, divide by 4, and tell you to send that amount in each quarter. Really.

This guy sells a calculator. He calls it an Annualized Installment calculator, but it will calculate your estimated payments using every method to find the lowest payment.

9

Oops. I forgot about state taxes.

If you live in a state with an income tax, you may also have to make estimated state tax payments. Most states follow a formula similar to the federal one, but not all. For example, California has some goofy rule that makes the percentage you have to pay different each quarter.

10

You mentioned your wife’s business. Are you asking what quarterly payments a small business must make? Some of the links posted about estimated taxes aren’t talking about payments a business must make. They’re talking about payments an individual must make, for income on which no federal tax was withheld.

If your small business paid wages, it will likely have to withhold social security and Medicare taxes from the wages, and then remit them quarterly to the feds. (Maybe income tax too.) It will file a quarterly Form 941, which has computations for the social security and Medicare amounts based on the total wages the business paid that quarter.

This IRS page has links for the various kinds of federal taxes small businesses have to pay.

11

If she’s self-employed and has no employees, then she doesn’t have to worry about those. I don’t know offhand how the Social Security / Medicare taxes are handled, but I believe that self-employed people file a Schedule C (I presume that’s where the expenses and social security etc. are crunched).

FYI, depending on the nature of the business, the spouse with a regular job might opt to increase his deductions. If total income is, say, 100,000 (and 20,000 tax due), they don’t care whether the wife paid 10,000 estimated and the husband had 10,000 withheld. Since you’ll file jointly, it all gets added together.

Note: I haven’t found specific cites to support that, but I haven’t found cites to contradict it either. And we have in fact done things that way in the past: when my husband worked at a contract-type job that didn’t do withholding, then years later when we had a nanny and had to pay her taxes.

Ideally you’d have crunched your wife’s income by now and sent in some money 3 days ago to cover her earnings for the 4th quarter. But regardless, even if you wind up being underwithheld, the penalty isn’t too draconian (from memory, from the one year we were underwithheld by enough to make a difference).

As an aside: We messed up our withholding one year. I did some estimating in October or so, went :eek:, and jacked up our withholding for the rest of that year. We still owed, just not enough to trigger a penalty. If our detailed pay statements had been audited, I believe the IRS could have penalized us (since we paid taxes later than we should have). But at least for payroll withholding, it doesn’t appear that they routinely look too closely to how things are spread out.

12

As long as you file a joint return, the IRS only cares about total income, tax and withholding. Everything is fine, as you’ve observed.

However, if you file separately, it can make a big difference. I saw a case where a divorce before year-end meant that the ex-wife got a $14,000 refund for her extra W-2 withholding and the self-employed ex-husband got saddled with the $14,000 bill. So it might be a good idea for each person to do their own withholding/estimated payments just to cover those outlier scenarios.

Oh, and any withholding done through payroll is considered evenly spread out through the year. The IRS only worried about timing for estimated payments.

13

My wife is a freelance writer, and I have a regular job. This is correct; she files a Schedule C and it all goes together on the 1040 on different lines. That includes the self-employment tax. She does estimated payments for both Federal and California.
The OP should note that if you are self employed you can start a SEP, which is kind of like a 401K but without employer matching.
I recommend TurboTax also, since it walks you through all this as well as through computing any necessary estimated payments for the next year. It is a bit spotty on the SEP - in some years you had to go to the tax form to do it, though it is always good about telling you the maximum amount allowed. (You can make a SEP deposit up to April 15, so it is not too late for 2012.)
She keeps good records of expenses. She mails in her estimated payments, by the way.

It actually be a good idea to use an accountant for the first full year. There may be a lot more business expenses than you think, and an accountant can tell you which ones are viewed as valid and which are not. But after that, TurboTax is the way to go, unless perhaps things get too complicated. My wife has no employees, so I have no clue about that part of it.

14

You believe incorrectly.

Internal Revenue Code Section 6654(g)(1) says:

“Section 31” is the section of the IRC that imposes withholding on wages.

Or if you would prefer to read it in an IRS publication, see the instructions for Form 2210 Part IV, line 19:

If all of that is making your eyes glaze over, then the rule is:
Add all your withholding together for the whole year, no matter whether it was withheld on Jan 1 or Dec 31. Divide by 4. Count that as an estimated tax payment for each quarter.

Or you have the option of keeping track of when withholding was actually taken out and filing Form 2210 to reflect the the actual dates.

But if you choose to just treat your withholding as four equal payments, no IRS audit of any kind is going to result in any penalty because the law explicitly says that you may do that.

Note that this special rule (that you may treat all withholding, no matter when paid, as four equal estimated payments) applies only to withholding. It does not apply to estimated payments you send in yourself.

15

Everyone’s covered the income tax and withholding questions, I think! Mr. Legend has worked as a contractor and also as a partner in an LLC, and this is what we’ve done. TurboTax isn’t bad, but it’s worth keeping an eye on anything that isn’t pretty standard. As a self-employed person, your wife will be filling out a Schedule C; if she had any business expenses, she can deduct them on that form as well. The rules are different if you have a corporation - different enough that we’re paying for a tax lawyer to review our return this year.

Although those of us who have been filing quarterly are automatically concerned that you’re posting this three days after we sent our checks in (or e-filed, for those who didn’t get so frustrated with the registration process that they gave up on it entirely), if your wife didn’t make all that much in the last quarter of 2012, you don’t have to worry about making your first quarterly payment until April 15. Bonus: you can assign your tax refund, if any, to pay your estimated taxes!

Also, depending on where you live, don’t forget to consider gross receipts tax. Oh, the fun of self-employment!

16

I worked as a contractor for about 5 months and reported my income to the IRS as requested. So they started sending me bills, which I duly paid. Then the company I worked for reported my income the next year, and I got an IRS notice about the same money I owed which I was already paying. I wrote and wrote and wrote, and had to jump through several hoops and finally go through a real H&R Block person who know what to tell those people, since clearly my mail wasn’t getting through to them. She didn’t charge for that either. All she charged for was that year’s regular joint filing. Not the two times we visited her again.

The H&R Block agent said I didn’t have to pay the thing quarterly, just report it quarterly. The e-filing I had been doing didn’t support that, apparently.