Do I need to pay Estimated Tax when last year's tax was $0?

[snnyj]

It's my first year of operating a small business (to be reported on Schedule C) as a self-employed person. It says I need to pay the smaller of 90% of current year tax or 100% of last year's tax. If my last year tax was $0 because the business didn't exist, do I have NO estimated tax payments due or do I need to calculate 90% of current year tax?

[rjs · Accepted solution]

"Last year's tax" doesn't mean just the tax on business income. It means the total tax on last year's tax return, no matter what kind of income you had last year.

[Carl]

An unwritten "rule of thumb" that works for many in their first year of self employment, is to send the IRS at least 20% of your gross business earnings each quarter. Then come tax filing time you'll be fine. If you anticipate that your total income from all sources will be more than $160K, then you should send 25% each quarter.

If your state taxes personal income, then you should send your state at least whatever the maximum tax rate is for the state, each quarter. Doing that practically guarantees you'll get some of that refunded from the state at tax filing time, and you don't risk any underpayment penalties. As far as I know at this time, the highest state income tax rate is 8.25% and I think that's either CA or NY, but not sure.

[Anonymous_]

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@Carl wrote:

An unwritten "rule of thumb" that works for many in their first year of self employment, is to send the IRS at least 20% of your gross business earnings each quarter. Then come tax filing time you'll be fine. 

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That "rule of thumb" may work for you and some other taxpayers. but most are probably better off going with 90/100/110 for estimates as it absolutely guarantees there will be no penalty for underestimated tax payments.