I've been reading up on self employment, quarterly estimated payments, underpayment, all that stuff, and I'm confused about just about all of it.
I have a regular day job, and also I started freelancing this year, where I make roughly 40% of the money as my regular job. My first pay was in April, and I don't have any guarantee that I'll continue to work the rest of the year.
Everything I read tells me that I have to make estimated tax payments.
First thing - I've never understood how to keep FICA separate from regular tax. In my paycheck FICA is a fixed amount and doesn't even come into play during 1040 time. In the estimated payments, I'm supposed to make one big payment. How do I know how much of that money went to FICA vs. regular income tax? What happens if I end up paying more than the yearly cap for Social Security?
Second - the calculations involved are really confusing me. Suppose I don't do estimated payments, and instead tell my employer to withhold an extra $X dollars per paycheck, based on what I think my liability will be from the IRS Tax Withholding Estimator tool? Will that keep the IRS happy? I've read that they penalize based on when those estimated payments should have been made, but if I'm paying through my employer throughout the year, they're getting their money on time.
Third, are the penalties even published anywhere? I've seen contradictory articles, but it seems it's only something like 4% of the underpayment - so if I underpay by $2000, then I only need to pay the $2000 plus around $80 next April. It would make sense to me to pay off some 16% credit card debt with my current cash on hand and just eat the penalty later - is that even an option, or is that some kind of crime?
Any help is much appreciated.
