estimated tax

[Joe C1]

I retired in 2022 but had some deferred compensation fall into 2023.  that compensation had federal tax withdrawn at a rate higher than my expected marginal tax rate.  I figured that would be enough to cover and Investment income for 2023 and thus was not expecting to make any 2023 estimated tax payments.  in the 2nd half of 2023 I started doing some consulting work, the income for which did not have any tax withholding.  So now I find myself in a position where I need to make an estimated tax payment.  if I make an estimated tax payment for Q4 to cover my estimated withholding shortfall for 2023 that resulted fully due to earnings generated in the 2nd half of the year, am I going to be subject to a penalty for making no prior quarter estimated payments, based on an averaging the income over 4 quarters?  specifically, I earned the bulk of my 2023 income in Q1and had $31k of FIT withholding in Q1.  my total estimated tax for 2023 is $36k.  so essentially I paid 86% of my full year tax liability in Q1.  if I pay $5k estimated tax for Q4, is the IRS going still charge me a penalty because I didn't pay 25% of that in each quarter?

[Anonymous_]

@Critter-3 

[Critter-3 · Accepted solution]

There will be no federal penalties for not paying in enough taxes during the year if withholding
1) and timely estimated tax payments equal or exceed 90% of your 2023 tax or
2) and timely estimated tax payments equal or exceed 100% of your 2022 tax (110% if your 2022 adjusted gross income was more than $150K) or
3) the balance due after subtracting taxes withheld from 90% of your 2023 tax is less than $1,000 or
4) your total taxes are less than $1,000

The lower of 1 or 2 is your required annual income tax payment. 1 is difficult to know until the year-end so generally option 2 is the safer option. Under the simplified method 25% of the estimated taxes must be paid in each period by 4/18, 6/15, 9/15 and 1/15/24. Unless you can show otherwise 25% of your annual withholding is assumed to occur in each period.

Failing this and being subject to penalties you can use the annualized installment income method.
this method requires knowing your income and deductions through 3/31, then 5/31, then 8/31, and finally year end which should be the same as the tax return. the income is annualized. taxes are computed on the annualized income and then de-annualized. Your tax payments for each period must equal or exceed these amounts to avoid penalties. Estimates are treated as being paid on the date THE USPS postmarks them an office machine postmark is treated as being paid when the IRS gets it. A 4th-period payment won't help with any penalties for the first 3 periods but the sooner the 4th-period estimate is paid the lower any penalties for the 4th period.

[Mike9241 · Accepted solution]

we can't tell if you'll be subject to a penalty for the 3rd quarter. Not only do you owe income taxes on the consulting income but also self-employment tax. the Social Security amount will vary based on your Social Security Wages. The Medicare portion is 2.9% of .9235 of your net SE income

however, there are some safe harbors

There will be no federal penalties for not paying in enough taxes during the year if withholding and
a) timely estimated tax payments equal or exceed 90% of your 2023 tax or
b) timely estimated tax payments equal or exceed 100% of your 2022 tax (110% if your 2022 adjusted gross income was more than $150K) or
c) the balance due after subtracting taxes withheld from 90% of your 2023 tax is less than $1,000 or
d) your total taxes are less than $1,000

state laws differ

some other options 

1) the default is that withholding is assumed to be 1/4 of the annual amount for each estimated tax period. You can use actual withholding for all periods.

2) if there are penalties you can also try using the annualized income method on page 3 of the 2210

 try using the annualized installment method on page 3 of the 2210  

state laws differ