I currently have both a full time job (W2) and a bunch of freelance income. Each year, I make sure that the W4 withholding choices I make at my job ensures that enough taxes are sent to the IRS that I hit the safe harbor level relative to the previous year's tax bill (when I started, this was 100%; I now make enough that it's 110%). That way, I do not need to file estimated taxes for my freelance income. I just save what I owe during the tax year, and pay any resultant taxes before April 15th of the following year.
I am considering leaving this job and relying purely on my freelance income. If I did this, what would I do to ensure that I was not hit with any penalties on my next tax return? It's now May 15, 2023. Thus far this year, I have been paying taxes only via withholding. If I stay in my job until December 31st, I will have paid enough taxes via withholding to hit the safe harbor and avoid underpayment penalties for the rest of my income. If I leave my job before that, however, I will not. What does one do in such a situation?
Suppose that I left my job today: May 15th, 2023. What would I do next? Would I work out how much I'd paid via withholding this year thus far and then fill the "gap" between May 16th, 2023 and Dec 31, 2023 with estimated taxes? If so, how would I divide up the year? As far as I understand it, withheld taxes are annualized but estimated taxes are not. Would I need to allocate the withheld taxes to the Jan 1 to May 15 period and the estimated taxes for May 16 to Dec 31? If so, would I be penalized for having uneven or missed estimated tax payments (obviously, there is no way I can pay estimated taxes for the pre-April 15 period now).
Logically, I'd assume that I should divide the year up into four. This would involve working out what I'd paid in the first quarter via withholding and then paying exactly that number on June 15 (by adding an estimate payment to my existing withholding contributions), on September 15 (with an estimated payment) and on January 15th of next year (also with an estimate payment). Is that correct? The IRS has confused me a bit, because on the one hand it says that if you hit one of its three safe harbor rules (less than $1,000 owed, paid 90% of what's owed, paid 100/110% of last year's bill), you won't incur a penalty, but on the other hand it says that when estimated taxes are involved the payments all have to be even, and that you can be assessed a penalty for an underpayment even if you end up with a refund.
Thanks,
Enfant
