Quarterly taxes for high income W2 and lower self employed income

[Hbfs2]

Hello, 

I am new to receiving self-employment income. The bulk of my income comes from a W-2 position. I make a smaller amount from a 1099 position. For the sake of discussion the amounts are approximately:

W2 - $450k

1099 - $60k

I have 3 questions: 

1. I have heard if I just set my withholding to 0 I can have the maximum taxes withheld from my W2 position and be in the “safe harbor”, not owing any estimated taxes. Of course these depends on the values of each income , but how do I know that I am there? Currently W4 has 4 dependents.

2. I have already missed the first two quarterly tax payments, can I pay make up amounts at the next payments due and how do I know what that amount would be?

3. In the above scenario, what if the penalty at end of year filing if I don’t pay quarterly?

Thank you. 

[conniem123 · Accepted solution]

Hi Hbfs2!

Thank you for your question!

In response to your questions;

1.  Your withholdings are based on your Form W-4 that you have submitted to your employer, will definitely be higher if you select Married and 0 dependents, rather than Married and 4 dependents.  That is not the maximum withholdings, as you can enter an amount on Form W-4 line 4c to have additional withholdings also.

The "safe harbor" of not owing estimated taxes may be confused with the safe harbor of not owing an underpayment penalty.  When you do not have enough withheld from your W-2 job and/or estimated tax payments, you could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty will depend on how much you owe and how long you have owed it to the IRS.

There are two ways to avoid the underpayment penalty.  The safest option to avoid an underpayment penalty is to aim for "100 percent of your previous year's taxes." If your previous year's adjusted gross income was more than $150,000, you will have to pay in 110 percent of your previous year's taxes to satisfy the "safe-harbor" requirement. If you satisfy this test, you won't have to pay an estimated tax penalty, no matter how much tax you owe with your tax return.

If you expect your income this year to be less than last year and you don't want to pay more taxes than you think you will owe at year end, you can choose to pay 90 percent of your current year tax bill. If the total of your estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty. So you may want to avoid cutting your payments too close to the 90 percent mark to give yourself a safety net.

If you expect your income this year to be more than your income last year and you don't want to end up owing any taxes when you file your return, then make enough estimated tax payments to pay 100 percent of your current year income tax liability.

2.  You would estimate tax payments based on you estimating your self-employed net profit.  You would need to estimated your business income and business expenses to arrive at the net profit.  Then you can use the TurboTax calculator, including other sources of income, and estimate your 2023 taxes.  You could compare to your pay slip year-to-date withholdings to determine if estimated tax payments are necessary.  Here is the link to the TurboTax calculator; https://turbotax.intuit.com/tax-tools/

3.  The penalty if you do not pay quarterly is addressed above item 1).  It is possible that your withholdings from your salaried job will be enough to "cover" taxes on the additional self-employed profit.

I hope this information is helpful.  Have a great day!

Connie

[Hbfs2]

This is very helpful. Thank you. 

One follow up: Is there a line on the prior year return that shows if I paid an underpayment penalty without realizing it?

Edit: Found at Line 38. Thanks