I have to pay quarterly taxes - now what? (US)
March 29, 2017 11:30 AM Subscribe
I have a side business that has surprised me by doing really well these past couple years (yay!). I am also employed full time (yay!). I know I need to start filing estimated taxes quarterly this year, but what does that mean? Does that mean just for my side business, or for all of my income?
I thought this would be easy to figure out on my own but I’m having a hard time teasing out a specific answer from all the info out there intended for people who are 100% self-employed or people who are considering a side business but haven’t made any (or much) money yet.
Here are some details -
Me:
Salaried, full-time employee of a company that issues me an annual W2. Federal taxes are deducted from each paycheck. My pre-tax income is about $90k from this job. I filed my 2016 taxes as single, head of household, and I have one dependent (my daughter, born in 2016). I owed about $4000 in taxes for 2016, almost entirely due to owing taxes on my side business’s earnings (that’s fine, and I expected it). I live in a state without a state tax.
My understanding was the business’s first year (2016) could be rolled into my personal taxes, but after that (2017 and beyond), I’d need to pay estimated taxes on it “quarterly” (I know they’re not equally sized quarters). I got this understanding from the intertubes, self-employed friends (for whom their self-employment is their only employment), and a CPA I hired last year who said I’d need to start paying quarterly in 2017.
My side business:
It went official in January 2016 - it’s legally registered as a business in my city and state. It’s a sole proprietorship. It has its own checking account and credit card to keep “business” money separate from “my” money. It earned about $20k in all of 2016 - its first year as an official business.
This year, I estimate it might earn around $35k. It does not earn consistently: nearly half of my side business income is earned in October, November, and December, and those payments land in January, February, and March of the following year. I run the business entirely online (it’s a blog), so there aren’t many deductions: I don’t have a home office, no employees, no inventory, don’t use my car for the business, etc. Honestly, it kind of surprises me each year. I always think “oh, it can’t possibly beat last Christmas” and then out of nowhere it does.
So far, in 2017, the payments I’ve received for my side business total up to $14,752.
My question:
When I make my first estimated payment this April, am I supposed to pay taxes on just the $14,752 minus expenses (I renewed my hosting, bought a new domain, etc), or do I need to include all of my day job salary income for Jan-March, too?
I thought it was the former, so I was happily filling out a 1040ES until I got to line 6, which says: “Enter your expected wages (if subject to social security tax or the 6.2% portion of tier 1 railroad retirement tax)”, which suggests I need to also include my day-job wages… right? I don’t pay myself a “wage” from my side business. In fact, all the money it has earned is still sitting in its own checking account (and I would very much like to roll it into my personal account).
What I’d like to do is keep paying personal taxes on an annual basis, and pay the estimates for the side business separately (on a “quarterly” basis). What happens when I go to file my personal taxes for 2017, though? Will the sole proprietorship side business still be rolled into my personal taxes, just with less owed because I paid taxes for it all year long?
Please hope me - I am apparently better at making money than I am at doing the taxes for it.
Thank you!
PS: I would also love your recommendations for online software/tools for paying these quarterly taxes. I use TurboTax's website for my personal taxes but I'm not sure if I need their actual software now or what.
I thought this would be easy to figure out on my own but I’m having a hard time teasing out a specific answer from all the info out there intended for people who are 100% self-employed or people who are considering a side business but haven’t made any (or much) money yet.
Here are some details -
Me:
Salaried, full-time employee of a company that issues me an annual W2. Federal taxes are deducted from each paycheck. My pre-tax income is about $90k from this job. I filed my 2016 taxes as single, head of household, and I have one dependent (my daughter, born in 2016). I owed about $4000 in taxes for 2016, almost entirely due to owing taxes on my side business’s earnings (that’s fine, and I expected it). I live in a state without a state tax.
My understanding was the business’s first year (2016) could be rolled into my personal taxes, but after that (2017 and beyond), I’d need to pay estimated taxes on it “quarterly” (I know they’re not equally sized quarters). I got this understanding from the intertubes, self-employed friends (for whom their self-employment is their only employment), and a CPA I hired last year who said I’d need to start paying quarterly in 2017.
My side business:
It went official in January 2016 - it’s legally registered as a business in my city and state. It’s a sole proprietorship. It has its own checking account and credit card to keep “business” money separate from “my” money. It earned about $20k in all of 2016 - its first year as an official business.
This year, I estimate it might earn around $35k. It does not earn consistently: nearly half of my side business income is earned in October, November, and December, and those payments land in January, February, and March of the following year. I run the business entirely online (it’s a blog), so there aren’t many deductions: I don’t have a home office, no employees, no inventory, don’t use my car for the business, etc. Honestly, it kind of surprises me each year. I always think “oh, it can’t possibly beat last Christmas” and then out of nowhere it does.
So far, in 2017, the payments I’ve received for my side business total up to $14,752.
My question:
When I make my first estimated payment this April, am I supposed to pay taxes on just the $14,752 minus expenses (I renewed my hosting, bought a new domain, etc), or do I need to include all of my day job salary income for Jan-March, too?
I thought it was the former, so I was happily filling out a 1040ES until I got to line 6, which says: “Enter your expected wages (if subject to social security tax or the 6.2% portion of tier 1 railroad retirement tax)”, which suggests I need to also include my day-job wages… right? I don’t pay myself a “wage” from my side business. In fact, all the money it has earned is still sitting in its own checking account (and I would very much like to roll it into my personal account).
What I’d like to do is keep paying personal taxes on an annual basis, and pay the estimates for the side business separately (on a “quarterly” basis). What happens when I go to file my personal taxes for 2017, though? Will the sole proprietorship side business still be rolled into my personal taxes, just with less owed because I paid taxes for it all year long?
Please hope me - I am apparently better at making money than I am at doing the taxes for it.
Thank you!
PS: I would also love your recommendations for online software/tools for paying these quarterly taxes. I use TurboTax's website for my personal taxes but I'm not sure if I need their actual software now or what.
Best answer: The easy way to deal with it is to just make sure you pay enough estimated taxes in 2017 so that the total taxes you pay in over the course of the year (through withholding and quarterly estimated tax payments) are at least as much as the total you paid in 2016.
You may still owe more tax for 2017 if you didn't pay enough in the estimated payments, but you won't have to pay penalties.
posted by kindall at 12:51 PM on March 29, 2017 [1 favorite]
You may still owe more tax for 2017 if you didn't pay enough in the estimated payments, but you won't have to pay penalties.
posted by kindall at 12:51 PM on March 29, 2017 [1 favorite]
Best answer: You aren't really paying taxes once a year - you are paying taxes every paycheck via your employer's withholding. Right now, once a year, you calculate the total taxes due on all of your income (salary, dividends, royalties, schedule c) and pay the difference or get a refund. If the amount paid in during year is more than just a little below what you owed, you would have a penalty.
When you know that you will have a significant amount of income that is not subject to withholding (as in your business) then you make quarterly payment through the year so you don't owe a penalty for underpaying.
Estimated taxes cover the difference between withholding and what you expect will actually be due, divided by four. Since the tax rate is lower on the first $14k of income than it would be on an additional 14k on top of your salary, you have to allow for that. But remember, you are still also paying taxes via the withholding on your paycheck so what you do is calculate the total that would be due and the subtract what is already being withheld. Turbotax should have an option for estimating 2017 taxes where it assumes most things will be the same except for the things you know will be different.
If it gets too confusing, there is a "safe harbor" that lets you avoid penalties for underpayment if you make sure that the total of your withholding + estimated tax payments = 110% of last year's taxes. You might still have to write a big check (if you have lots of extra income) but no penalties.
posted by metahawk at 1:21 PM on March 29, 2017
When you know that you will have a significant amount of income that is not subject to withholding (as in your business) then you make quarterly payment through the year so you don't owe a penalty for underpaying.
Estimated taxes cover the difference between withholding and what you expect will actually be due, divided by four. Since the tax rate is lower on the first $14k of income than it would be on an additional 14k on top of your salary, you have to allow for that. But remember, you are still also paying taxes via the withholding on your paycheck so what you do is calculate the total that would be due and the subtract what is already being withheld. Turbotax should have an option for estimating 2017 taxes where it assumes most things will be the same except for the things you know will be different.
If it gets too confusing, there is a "safe harbor" that lets you avoid penalties for underpayment if you make sure that the total of your withholding + estimated tax payments = 110% of last year's taxes. You might still have to write a big check (if you have lots of extra income) but no penalties.
posted by metahawk at 1:21 PM on March 29, 2017
Best answer: If your side business is not incorporated or an LLC - that is, you don't need to file a separate tax return for the side business but instead address any revenue and expenses from it on Schedule C of your 1040 - it really doesn't matter how you ensure that enough money has been withheld to pay your income taxes. It would probably be easiest to up your withholding from your salaried position either by changing your W-4 filing status (from head of household to, say, just single so the amount withheld is higher) or by designating an additional amount to be withheld from each paycheck. If you want to make quarterly estimated payments instead, you send off each quarter about enough money to cover the taxes you will owe for your side business.
In my experience, the IRS really wants your quarterly estimated payments to be equal across all quarters, even if your income is not. The year my last remaining parent passed away (on April 17) and I sold many of the inherited securities in the third quarter, thereby racking up income on which I would owe taxes, I was penalized for starting estimated payments in the third quarter. Apparently, I was supposed to anticipate my mother's death, the specific securities I inherited and the price at which they would be sold so that I could make four estimated tax payments of equal size. My bad.
posted by DrGail at 1:28 PM on March 29, 2017
In my experience, the IRS really wants your quarterly estimated payments to be equal across all quarters, even if your income is not. The year my last remaining parent passed away (on April 17) and I sold many of the inherited securities in the third quarter, thereby racking up income on which I would owe taxes, I was penalized for starting estimated payments in the third quarter. Apparently, I was supposed to anticipate my mother's death, the specific securities I inherited and the price at which they would be sold so that I could make four estimated tax payments of equal size. My bad.
posted by DrGail at 1:28 PM on March 29, 2017
DrGail, there's a form you can file to show that your income was dramatically different in one quarter. I've done it. It's very worth re-filing if you got penalized.
posted by straw at 2:15 PM on March 29, 2017
posted by straw at 2:15 PM on March 29, 2017
Best answer: In my experience, the IRS really wants your quarterly estimated payments to be equal across all quarters, even if your income is not.
They're trying to prevent people who can control the quarter in which the income is realized from arranging to have all the income realized in the last quarter, thus allowing them to pay those taxes only in the last quarter (and keeping the time value of the money for the first three). As straw says, you can file a form demonstrating that your income was truly earned later in the year.
OP: the IRS is not really seeking estimated taxes just on your side income. In effect, it's already collecting estimated taxes all year long through your payroll withholdings. It's just that the estimate will be an underestimate if you have significant non-W2 earnings. You just need to be sure that withholding + estimated taxes added together falls into one of the safe harbors already discussed here. If you have a non-basic tax program, it should be able to spit out suggested quarterly payments...or, given the money you're earning, for peace of mind it wouldn't be so bad to get a professional estimate.
posted by praemunire at 2:26 PM on March 29, 2017 [1 favorite]
They're trying to prevent people who can control the quarter in which the income is realized from arranging to have all the income realized in the last quarter, thus allowing them to pay those taxes only in the last quarter (and keeping the time value of the money for the first three). As straw says, you can file a form demonstrating that your income was truly earned later in the year.
OP: the IRS is not really seeking estimated taxes just on your side income. In effect, it's already collecting estimated taxes all year long through your payroll withholdings. It's just that the estimate will be an underestimate if you have significant non-W2 earnings. You just need to be sure that withholding + estimated taxes added together falls into one of the safe harbors already discussed here. If you have a non-basic tax program, it should be able to spit out suggested quarterly payments...or, given the money you're earning, for peace of mind it wouldn't be so bad to get a professional estimate.
posted by praemunire at 2:26 PM on March 29, 2017 [1 favorite]
Response by poster: Thank you, everyone - the explanations you all provided really clarified things for me!
posted by paris moon at 4:20 PM on March 29, 2017
posted by paris moon at 4:20 PM on March 29, 2017
This thread is closed to new comments.
posted by straw at 11:38 AM on March 29, 2017