Self Employed Estimated Tax Change

Inquisitor

Wondering if anyone has dealt with this kind of situation before and am looking for some advice.

This year I started working as an online college instructor, which makes me an independent contractor/self employed.

I calculated my expected income earlier in the year, which wasn't much because I was only teaching 1 class a quarter and didn't have anything lined up to teach for the summer quarter. It mathed that my taxes were low enough (sub $1,000) that I didn't need to file quarterly taxes. However, during the last semester, the students submitted feedback reports on the online instructors. I received 100% positive feedback, and was in fact the only instructor to receive positive feedback. Which is awesome. However, it also resulted in my school recently informing me that they would like me to teach 2 to 3 classes next quarter. Which will kick my self employed income over the threshold required to make quarterly payments.

So what course of action do I need to take to avoid getting slapped with fines or fees? I genuinely didn't expect this bump in pay, so it really quite caught me by surprise. I've missed two of the quarterly payments at this point. Do I just retroactively make them based on my new expected yearly income?

bowen

IIRC, you just pay more for the 2nd or 3rd quarter to make up for it to avoid penalties at the end of the year, assuming it's going to be penalty worthy

Inquisitor

Okay, so just throw 50% for the third quarter, and 50% for the 4th and I should be fine? And yeah, I'm probably dealing with chump change by IRS standards.

Anything related to taxes just kinda stresses and freaks me out.

Or would 75/25% be a better split?

Gdiguy

So there's a few weird rules with estimated taxes. The IRS rule is (https://www.irs.gov/taxtopics/tc306.html):

If you did not 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.

The last one is usually the easiest to calculate - if your total estimated tax payments equal your tax owed from LAST year, you won't get penalties for underpaying. You might owe more at the end of the year in actual tax, but there won't be penalties. The IRS actually has a complicated scheme if you're paid uneven amounts during the year (there's a link in that IRS page), but it's (as you might expect) complicated and unless you desperately can't afford I wouldn't bother with calculating it, it's just easier to pay 1/4 of last year's tax bill each quarter as a default.

As for your missed payments - yeah, I'd just pay them asap (you don't have to wait for the deadline, just pay them now). In theory, you'll get charged interest (usually 6%) on whatever you underpaid for however long it was owed (i.e., if you should have paid $1k in Q1 and you pay it Q3, you'll pay 6% interest on 1k for 6 months). You don't actually need to calculate this, you can just fill out your taxes at the end of the year and let the IRS calculate it and send a bill. The only issue is that it tends to slow your tax rebate if you're supposed to get one (I've done this, and a couple weeks after doing my taxes they sent a letter saying they were subtracting like $0.75 for interest penalties from my rebate check and mailing the check).

Note that this is for federal - states can be more anal about it (I've had issues with this for the last 5 years since as a PhD student I had no withholding, and the IRS has never charged more than a few bucks in interest, but California once hit me with a $25 or so penalty for underpaying).

Inquisitor

Gdiguy wrote: »

So there's a few weird rules with estimated taxes. The IRS rule is (https://www.irs.gov/taxtopics/tc306.html):

If you did not 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.

The last one is usually the easiest to calculate - if your total estimated tax payments equal your tax owed from LAST year, you won't get penalties for underpaying. You might owe more at the end of the year in actual tax, but there won't be penalties. The IRS actually has a complicated scheme if you're paid uneven amounts during the year (there's a link in that IRS page), but it's (as you might expect) complicated and unless you desperately can't afford I wouldn't bother with calculating it, it's just easier to pay 1/4 of last year's tax bill each quarter as a default.

As for your missed payments - yeah, I'd just pay them asap (you don't have to wait for the deadline, just pay them now). In theory, you'll get charged interest (usually 6%) on whatever you underpaid for however long it was owed (i.e., if you should have paid $1k in Q1 and you pay it Q3, you'll pay 6% interest on 1k for 6 months). You don't actually need to calculate this, you can just fill out your taxes at the end of the year and let the IRS calculate it and send a bill. The only issue is that it tends to slow your tax rebate if you're supposed to get one (I've done this, and a couple weeks after doing my taxes they sent a letter saying they were subtracting like $0.75 for interest penalties from my rebate check and mailing the check).

Note that this is for federal - states can be more anal about it (I've had issues with this for the last 5 years since as a PhD student I had no withholding, and the IRS has never charged more than a few bucks in interest, but California once hit me with a $25 or so penalty for underpaying).

That is definitely a lot easier to calculate for me, because the tax I owed for last year for federal was $0, and its pretty easy to figure 100% of 0. I'll still be filing in quarter 3 and 4 enough to total what I expect I will owe for 2016 in order to make sure I don't get slapped with a surprise bill out of nowhere come tax filing season, but at least I am less worried now about getting hit with any fines.