Ask Me Help Desk - Estimated quarterly payments

I have a couple of questions on this issue. I'm currently unemployed and not having withholding from unemployment insurance, plus some freelance income. So I thought I should be paying estimated taxes. I use Turbo Tax and ran through their Interview process to see how much they say I should pay. In doing this should I try to estimate my income going forward for the full year? If I do that, should I re run the numbers at the end of August to adjust the 3rd quarter payment?

Also the deadlines for the first two quarters have passed. Can I still send in money for the payment due 6/15? Would there be a penalty for doing so? Or should I wait for the 9/15 deadline and just send a larger amount?

You should make the best estimate regarding your anticipated income stream for the full year as you can. If things change during the year, then by all means update the data.

Yes, if you think you should be paying quarterly estimated income tax, it's better to pay now even though the deadline has passed for April and June. Any interest charge that you may end up owing when you calculate your full year taxes next April will be based on the lateness of your individual payments - so it's better to be 30 days late than 90.

Quote:

Originally Posted by ebaines

Yes, if you think you should be paying quarterly estimated income tax, it's better to pay now even though the deadline has passed for April and June. Any interest charge that you may end up owing when you calculate your full year taxes next April will be based on the lateness of your individual payments - so it's better to be 30 days late than 90.

If I understand this, on cannot start quarterly payments in mid year. So If I start, I will be accruing interest on the late payments for April and June? Is that correct?

If so, should I send separate payments? Turbo Tax printed up vouchers for me for each quarter. Should I send one check with each voucher? Or can I send one check with the two past due vouchers?

Scott<>

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Originally Posted by ScottGem

If I understand this, on cannot start quarterly payments in mid year. So If I start, I will be accruing interest on the late payments for April and June? Is that correct?

No - not true. You can make your first payment any time. If you were to pay now I would recommend using the voucher that's for June, and pay what you think you should have paid in April and June together. This will "stop the clock" on any interest you'll end up owing for the lateness of these payments. If you don't pay until later the clock is still running on interest you'll owe.

Quote:

Originally Posted by ScottGem

If so, should I send separate payments? Turbo Tax printed up vouchers for me for each quarter. Should I send one check with each voucher? Or can I send one check with the two past due vouchers?

Add the amounts that TurboTax told you to submit for April and June together and send the total with just the June voucher. If I recall how TT works - I think you can tell it that you paid $0 in April and then see what it calculates for vouchers for June, September, and January '10. If that doesn't work - just cross out the amount that it puts on the pre-printed June voucher and write in the correct amount, and be sure to keep a record so that when you do your 2009 taxes you reember what you paid, and when.

I'm still not getting this 100%. If I don't make quarterly payments, then I run the risk of a penalty for being underwithheld. However, since my income is going to be less than half of what it was last year, wouldn't that mitigate any penalty? Making a penalty less of a risk?

If I do send in an estimated payment for 6/15. Then you are saying I will be charged interest from 4/15 and 6/15 respectively since those payments are late? What would be the interest rate? And is it calculated on the amount of the payment that I (Turbo Tax) calculate?

Also, lets say I do get a full time job in the next month or so. Would I have to continue making quarterly estimates or risk being charged interests from the due dates? I was planning, if I get a job, to submit my W4 with 0 or 1 to try and catchup.

Scott - the fact that your income is less this year doesn't prevent the IRS from charging you interest for late payment. The only way to avoid interest charges is (a) during the year pay at least 90% of what you will ultimately owe, or (b) pay at least as much as you owed for all of '08. In your case option (b) doesn't make much sense, so your objective is to figure out as best you can what your total tax bill will be for the year and pay that amount through a combination of estimated tax payments and withholding (if you're daring, pay only 90% of that, and the remainder next April). Do that and you'll owe no interest.

The amount of interest for underpayment is 0.5% per month, and is calculated next April when you submit your tax return, because only then can you or the IRS figure out whether you underpaid, and if so by how much. There are two methods to determine how much interest you have to pay:

Technique 1: assume that your income was a steady stream all year, and consequently the taxes owed each quarter is constant. Compare that amount against how much you paid by the each due date (April, June, September, January), and charge interest from that due date up to the time payment is actually made.

Technique 2: Requires a bit more math - figure the actual amount of tax attributable to each quarter, using your actual income and deductions by quarter, and figure interest from the due date each quarter until actually paid. This technique is a lot of work, but is helpful if you have low income the first part of the year and higher income later on.

If you do get a job you should recalculate to figure out whether you should keep paying estimated taxes. It all depends on how much income you have from sources that don't withhold, and how much the extra withholding at your new job would go towards paying that off.

Now for a little secret - as long as you pay at last as much estimated income tax as you should during the year, it is unlikely that the IRS will nab you for interest charges due to a late April or June payment.

OK, I think I follow now. I thought you were saying that once I start estimated payments if I don't make each quarter's payment on time, then I would be charged interest from the due date until the date paid. But what I think you are saying is, as long as I have paid 90% of what I will owe by 1/15/2010 then I won't be charged interest or penalty.