Next time, I'm getting paid in donuts

October 30, 2006 8:22 PM

What happens if I don't make an estimated tax payment on December 15th?

I switched from working a regular job to working as a contractor September 1st (prior to that, I was getting taxes deducted). The total amount of money I will earn as a contractor this year will be less than $8000, and my total income for the year will be less than $24000. Also, I'm a student and anticipate getting the associated deductions.

From what I understand, I'm supposed to make quarterly tax payments, but a) I'm not sure how to figure out what I owe without my previous pay stubs, and b) it seems that the tax payment I'll be making once I file next year should be good enough. What are the ramifications if I skip this tax payment and just file once I get my W-2s?

posted by snickerdoodle to work & money (12 comments total)

you will owe extra money, not the end of the world. pay if you can to avoid the penalty payments which are designed to encourage you to pay on time.
posted by caddis at 8:44 PM on October 30, 2006

My last quarterly payment is due January 15.
posted by brujita at 10:22 PM on October 30, 2006

They start charging interest, invoke a penalty, and eventually get around to sending stern letters. The quarterly filings are estimates - there's no way to know what you're really going to owe them until the year is over. The quarterly dates are in April, July, October, and January.

Anecdotes:

I did not send quarterly payments at all in 2005 (my previous accountant was disorganized and unhelpful, and I didn't know I had to do this given my new income situation), and ended up owing about 3% more than I would have otherwise.

I completely ignored my 2003 taxes (didn't file, didn't pay) until 2005 in a vicious, year long ignore-and-worry cycle. I can't even remember what the penalty was, but it wasn't as large as I imagined it would be. The relief of sending the check far outweighed the annoyance of paying the money.

I know someone who ignored their taxes for something like three or four years in a row. The IRS gets antsy at that point, and the penalties and interest really start to climb. This person is apparently still saddled with a major chunk of debt that continues to rapidly accrue interest.
posted by migurski at 10:43 PM on October 30, 2006

You need to read the instructions and worksheet for the 1040-ES form (pdf).

If you only have a payment due for the fourth quarter you can skip making that payment "if you file your 2006 tax return by January 31, 2007, and pay the entire balance due with your return."
posted by D.C. at 12:59 AM on October 31, 2006 [1 favorite]

Yeah, not a big deal to skip your quarterlies. Just BE SURE to set the money aside for the end of the year.

That's a danger of independent contracting -- it's easy to think you have a big pile of money lying around, when in fact it's earmarked for the govt.
posted by LordSludge at 5:55 AM on October 31, 2006

You will not incur penalties if the total amount you have prepaid in taxes including your previous withholding equals either 90% of this year's tax liability or 110% of last year's tax liability. If you think the withholding you have already paid might be more than last year's tax liability, you don't need to pay quarterly taxes. But if you underpay, you may incur penalties. Since your income is small, and your tax will be commensurately small, penalties would also be very small.

Here's an estimated taxes 101: http://www.fairmark.com/estimate/est101.htm

I wonder if it's possible to get information about how much withholding you've paid YTD from your previous employer? You certainly have time between now and Jan 15 (when the 4th payment is due, as a PP mentioned) to figure out whether, and how much, you might need to pay in estimated tax.
posted by not that girl at 6:06 AM on October 31, 2006

Not sure where migurski is getting his/her info in terms of due dates, but they are actually April 15, June 15, Sept. 15, and Jan. 15. And yes, skipping the Jan. payment is not a big deal, just be prepared to pay more than you may have anticipated when you do your taxes. I found that out the hard way.
posted by Nathanial Hörnblowér at 7:26 AM on October 31, 2006

So you only owe quarterly taxes for the 4th quarter? The good news is that payment is not due until January 15, and that's just when it has to be postmarked.

Here's a back of napkin way to figure things out:

1) Download and print the 1040-ES form from irs.gov. If memory serves, you may also want to download publication 505, which contains more detailed information about estimated taxes.

2) Once you have your final paycheck for they year (which has year-to-date info on what you've been paid and what has been sent to the Feds on your behalf), and you know how much you have been paid on a contractor or 1099 basis (calculate this from stubs or bank deposits if necessary), and have some idea how much you've got in the way of deductions (you may have to sit down with your mortgage statements for the last year), get ready to spend maybe a half hour on pre-tax work.

3) Fill out the 1040-ES using your actual numbers, realizing that this is just an estimate. If you spend more than a half hour on this part, you are working to hard. Stop it!

4) Mail your Q4 estimated taxes using the 1040 ES voucher (either from the downloaded form, or from the packet the IRS sent you, whichever is appropriate) being sure to fill in the appropriate information by January 15, 2007.

5) Don't worry about taxes again until you have your official W-2, 1099, and 1098 info. The people sending you these documents MUST have them in the mail by January 31, so start rattling cages if you don't have them in hand by February 7 or so.
posted by ilsa at 8:52 AM on October 31, 2006

Working *too* hard. Oh, and make sure any paperwork you download is for the 2006 tax year. Yes yes you will be paying this in 2007, but this is tax on money you earned in 2006.
posted by ilsa at 8:54 AM on October 31, 2006

Holy crappies, I'm always supposed to pay estimated taxes and I never do. Like it's been ten years of this. Every year when I go into my accountant, we have the same conversation -- "Hey, did you send in those envelopes this year?" "Um... no. That's not a big deal, right?" "Nope. That's cool."

Seriously -- I've never sent in my estimated taxes. The penalty is insanely low. Considering that you're talking about 8 grand in taxable stuff and you're gonna make less than 25 grand, I say don't worry about it. Besides, aren't estimated tax payments only for people who filed as independent contractors the previous year?
posted by incessant at 9:53 AM on October 31, 2006

incessant: Estimated taxes are for people who have sizable income that would not be reported on a W-2. Although this includes independent contractors and people who are otherwise in business for themselves (sole proprietors, LLCs, S/C corps), it also includes people who have a lot of capital gains and dividend/interest income.
posted by ilsa at 1:35 PM on October 31, 2006

Thanks for the help, all. I'm not going to get any more paychecks from my 2 previous employers, and I made way more money in 2005 (when I wasn't in school), so the 110% safe harbor thing doesn't really apply. Does anyone know how I can figure out what the penalty would be (assuming I won't be able to file until end of February) so I can figure out if it's worth my time tracking down my previous employment information?

I suppose this is why I should have kept my pay stubs!
posted by snickerdoodle at 4:19 PM on October 31, 2006