Do I need to file estimated taxes if I know I'm getting a refund?

May 27, 2013 9:28 PM

Me and my wife work, and always get a tax refund. I'm making more with my side business, so do I need to pay estimated taxes even if we'll still be getting a refund if I don't?

My wife works full time, we have 2 kids, and I have a small part time job. On the side, I run my own business, which until now has not made much money at all. This year appears to be different, and I'll likely be bringing in 5-10K of taxable income.

We always get a substantial tax refund, and I'm estimating that even with my additional income, we'll still be getting a refund. While I know that you're supposed to pay estimated taxes on earned income quarterly, I don't know if that is still the case if you are already paying enough in taxes through your employers so that you wouldn't end up owing anything at the end of the year.

So, do I need to pay estimated taxes through the year if I'm still going to be getting a refund?

posted by markblasco to Work & Money (13 answers total)

In my experience, you only get a fine for not filing estimated taxes if you owe a significant amount at the end. Also, if you do happen to mis-estimate, you shouldn't have to pay the fine if it's the first year you're paying - only if you do it two years in a row. I'm not a tax lawyer, but that's been my experience.
posted by rainbowbrite at 9:32 PM on May 27, 2013

I am not a tax professional and this is just my experience. I made around what you are showing you will make. In my instance, I did not file quarterly estimated taxes, and I'm glad I didn't. I would have way overestimated my earnings due to things that were out of my control. I paid around $1k in taxes. The self employment tax rate is around 13% or so. I had to pay a little bit with federal taxes, but then got a refund with state taxes so we ended up slightly in the green.

The self employed (sub contractor) job was my only work, and my husband had a regular job for only a few months for the 2012 year. I am sure that if he had been working the full year, we would have had a federal refund.

1) If you don't pay quarterly, put some money away in case you do have to pay taxes. You may also get some penalties for not paying. I think I did but I don't have a number for it. (I used turbo tax.) I believe they do penalties as you technically are supposed to pay quarterly.

2) If you do pay quarterly, estimate a little lower so you don't have to pay as much. That way you can get out of paying too much for overestimating. You should get a refund if you do overestimate though.

Because of my experience I would not pay it the first year and see how your income is. That way you can better estimate if you do want to pay them. You can also see how it impacts your refund. I am unsure if you are the type who plans to buy things with your refund - some people do. If so, you may want to pay them so you can depend on that larger refund later.
posted by Crystalinne at 9:42 PM on May 27, 2013

Response by poster: Just to make sure what I meant is clear, even if I don't pay any estimated taxes, we'll still be getting a refund. My wife pays enough taxes through her job (and I do a little bit in my part time job) that we'll be getting a refund for sure whether I pay estimated taxes or not. If I do pay estimated taxes, we'll just be getting all of that money back. There is no possible way that we'll end up owing money next year, even if I don't pay any estimated taxes on my side business income.
posted by markblasco at 9:59 PM on May 27, 2013

You pay estimated taxes to make up for a shortfall in taxes, i.e., you owe money when filing due to your self-employment income. If there is no shortfall, no, you do not need to pay quarterly estimated taxes. They don't care how the money gets in; they just care that they get it.
posted by kindall at 10:16 PM on May 27, 2013 [1 favorite]

Best answer: From the IRS page on estimated taxes here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.

and further down the page:

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.

- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12 month period

So, if you did not owe taxes last year, you are OK. Also, if you aren't going to owe at least $1000 this year, you are OK. Sounds to me like you're twice-OK.
posted by Lady Li at 11:27 PM on May 27, 2013

Response by poster: Fantastic, thanks everyone!
posted by markblasco at 11:33 PM on May 27, 2013

To be clear, no tax liability for the previous year refers to the total taxes paid, not to whether or not you got a refund. For example, if you paid $10k in taxes, and got a refund of $1000, you still had tax liability.

Generally, you do not have to pay estimated taxes if you will receive a refund at the end of the year.

I am not a tax professional, this is just my understanding.
posted by danielparks at 4:12 AM on May 28, 2013 [1 favorite]

danielparks is correct about what “no tax liability" means. It sounds like you definitely do not meet this definition.

There is a safe harbor based on withholding. It's something like, you don't have to make estimated tax payments if your withholding through work will come to 100% of your tax liability for the previous year or 90% for the current year. Since your previous year is known (just look at your tax return) it's safer to go that route. I'm on my phone so can't cite the IRS guidelines, but you could find them easily enough by searching on "estimated tax safe harbor" or similar.
posted by payoto at 5:05 AM on May 28, 2013

We were in a similar situation this year (all my income is W-2 income with withholdings. My spouse makes some W-2 money and some non-W-2 money) and there were no problems with not filing estimated taxes. Caveat is that we file jointly. Here's some legal justification: Publication 17, Ch. 4

Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you may have to pay estimated tax... Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.

...

General rule. In most cases, you must pay estimated tax for 2013 if both of the following apply.

* You expect to owe at least $1,000 in tax for 2013, after subtracting your withholding and refundable credits.

* You expect your withholding plus your refundable credits to be less than the smaller of:

**90% of the tax to be shown on your 2013 tax return, or

**100% of the tax shown on your 2012 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers, below). Your 2012 tax return must cover all 12 months.

Be careful that you are accounting for the appropriate self-employment taxes as well.
posted by muddgirl at 5:58 AM on May 28, 2013

It sounds like you are on the right track and you don't need to worry. However, I just wanted to point out something that may be applicable to your situation: is part of your hefty tax refund the earned income tax credit? That credit has income limitations, and not knowing the details of your overall income, it's possible that your increased self-employment income may decrease or eliminate that credit to you. (There are many tax deductions and credits that are subject to income limitations, but when I hear someone mention a substantial tax refund, it's usually due to the earned income credit.) I just wanted to point that out if you were comparing the tax liability associated with this year's additional income against your refund from last year. And of course don't forget about self-employment taxes (but I assume you're on top of that since you've had this business going for more than a year).
posted by stowaway at 8:53 AM on May 28, 2013 [1 favorite]

Response by poster: Thanks for the info and clarification on everything. I know about self employment taxes, although to be fair, I've been able to write off enough expenses each year that I've never noticed them that much, since my income has been really low (1-2k max on my taxes each year). Our tax return is high just because we haven't adjusted anything as our incomes changed, and with the 2 kids, so while we used to come close to even, now we get a good sized chunk, which is always a fun "surprise" each year. If I end up making more than expected this year than I'll look more closely into paying estimated taxes, but for now I'll just go with what we've been doing. Thanks!
posted by markblasco at 12:23 PM on May 28, 2013

At least a few years ago, there was a method of calculating your penalty, should you somehow underpay (a good situation as this could only happen if you suddenly make a whole bunch, and were assuming you would make *less* than the year before), not via how much you made for the entire year but instead on how much income you had in each quarter. It's annoying, and the year I needed this provision Turbotax didn't have it coded properly, but it can reduce your penalty below that based on the 100% of last year/90% of this year mentioned above. (it reduced mine to zero, well at least to the time I spent chasing this down.)

Also, at today's interest rates it doesn't really matter, but the fun surprise you get in April is your own money that you haven't been earning interest on (or paying down debt with) all year.
posted by nat at 7:08 AM on May 29, 2013 [1 favorite]

Gah I should have mentioned that this provision can only help you if you pay estimated taxes as soon as you have income above what your withholding will cover. So if you suddenly make a bunch, and your withholding will be below last year's liability, just start paying estimates then.
posted by nat at 7:13 AM on May 29, 2013