Calculating penalties for underpayment of Estimated Taxes

[kp79]

@TomYoung @Carl Thank you both kindly for your thoughtful replies and for helping me navigate this (what I consider, rather hairy) situation. 

Carl, thanks for walking me through your "self-imposed 20% rule" .

Be aware that the SE tax is basically paying 12.4% of the SE tax to "MY" social security account. 6.2% is the "employee" contribution and the other 6.2% is the "employer" contribution.  I look at it as paying my "future self" for social security which I will get when I reach retirement age. The remaining 2.9% of the SE tax is the Medicare tax that goes into the Medicare general fund.

I did not know that! So would all the SE taxes go into MY social security account and accrue my balance, and (if social security is still around) will I be able to claim it?

Finally, if your state also taxes personal income then you must also send quarterly payments to your state. The highest state tax rate I am aware of at this time is California at 13.3% on personal income. So in that first year of business you should send your state a percentage of your gross income that is equal to the highest tax rate of your state. Then in later years you can lower it as appropriate.

Thank you, I had forgotten about this. The tax man strikes again, I guess :( And yes, sadly I am in California and will be paying 8-12%

Tom, thanks for clarifying that the Q3 rate is 3%, not 5%, and you are right, turns out that if I pay now, the interest penalty is not a hell of a lot of money ($500 combined for federal and state)...so I am less worried now! Still, I will make my payment immediately.

By the way, for paying the IRS, do you recommended to use:

• Electronic Federal Tax Payment System (EFTPS).
• Treasury Department is Direct Pay

Where do I get / print the vouchers from? Is there a way to do this from within TurboTax?

Thanks again.

[TomYoung]

@kp79 

Since I've been making 4 quarterly estimated tax payments for ages I have opted to use the Electronic Federal Tax Payment System.  It's pretty easy to set up a string of future payments and if you decide you need to change a particular payment or payments, it's also pretty easy to modify the payment or payments.

The disadvantage is that you loose the "float" but in these days of near zero interest rates that amounts to pennies.

If you want to mail in your payments you can simply print out an empty 1040-ES if you're using a desktop product - not sure about the online products.  Or you can download the Form 1040-ES booklet and use the empty vouchers at the bottom of the booklet.  https://www.irs.gov/forms-pubs/about-form-1040-es

[Anonymous]

i also make estimated tax payments but I use IRS Direct Pay.  no need to wait for EFTPS letter approving your enrollment.  you can use it immediately, it also enables you to cancel the payment but it must be done within the specified period.    however, the EFTPS system must be used if you have employees for which you make payroll tax deposits. 

[Carl]

I did not know that! So would all the SE taxes go into MY social security account and accrue my balance, and (if social security is still around) will I be able to claim it?

You're asking questions I don't know the answers to. Basically because your question relates to social security payments, and not taxes. However, if you go to SSN.GOV and log in (create an account if you don't already have one) you can pull up your account to see how much you've paid into it since the first year you started working and having the SS tax withheld from your pay.

It's not uncommon for your account to not include the current year, and for some it may not include the prior year either. I don't know why the Social Security Administration is so far behind for many. You'd think that with today's technology they'd be on top of it for everyone at all times. But the fact is, it just isn't so. Apparently since congress consistently steals "OUR" money from social security, I suspect even the SSA folks don't expect it to be around when it comes our time to retire and collect.

[Anonymous]

your question should be directed to the SSA. there is a difference between wages and s-e income. W-2's are filed with the SSA which transmits the data to the IRS. it's the other way around for s-e income.