When calculating 2019 1040 ES payments, to avoid penalty for underpayment, what does "taxes paid last year" mean? Fed Income Tax only, or SE tax and Medicare too?

[drdively]

One way to avoid penalty is pay 100% of taxes paid last year.  Does "taxes paid last year" mean just income tax, or does it include the employee portion of SS and Medicare paid last year?  A related question is, if you start a tax year with taxes withheld, then change to 1099 income, will you still get hit with a penalty?

[dmertz]

Self employment taxes are to be included in "taxes paid last year."  For most people, "taxes paid last year" is the amount on 2018 Form 1040 line 15 (except for amounts from Schedule 4 line 59 resulting from other than distributions and certain amounts that might be included on Schedule 4 line 62).

Regardless of where your income comes from, if you have insufficient tax withholding to cover at least 100% of "taxes paid last year" or 90% of your current-year tax liability and a balance due of more than $1,000, you'll have a penalty.  To avoid that you might need to make quarterly estimated tax payments to avoid per-quarter underpayment of taxes.

https://www.irs.gov/taxtopics/tc306

[section223]

I have made this long convoluted answer because it is not clear from your question if you were referring to SS and Medicare taxes paid as an employee in the previous year or were referring to self-employment taxes paid in the previous year. Indeed, it is likely that when you typed "SE tax and Medicare", you actually meant "SS tax and Medicare" and didn't mean self-employment at all.

You asked two questions here, with slightly different terms, but which differ greatly in meaning. In your questions, you asked about "Fed Income Tax only, or SE tax and Medicare too?". However, in your subsequent discussion, you asked about "does it include the employee portion of SS and Medicare paid last year? ". The "SE tax and Medicare [tax]" are treated differently than the "employee portion of SS and Medicare [tax]", for purposes of the 2210 (underpayment of estimated tax).

The term "SE tax" refers to "self-employment" taxes. This is the tax that you pay on income generated not as an employee but as someone self-employed who normally files a Schedule C. The amount of the SE tax is 15.3%.

Currently, employees pay 7.65% in employment taxes: 6.2% for Social Security taxes and 1.45% for Medicare tax. The employer matches this amount by paying a separate 7.65% on your behalf. This employer amount does not appear on your tax return.

You may notice that the 7.65% that the employee pays plus the 7.65% that the employer pays adds up to 15.3% - the same amount of the self-employed person pays for "self-employment" tax. So these amounts end up in the same place: the Social Security Administration who allocates the money to Social Security and Medicare.

However, although these amounts end up in the same places, they are not treated the same way when it comes to estimated taxes.

You asked if the employee portion of SS and Medicare tax should be included in the calculation of 100% of last year's tax. The IRS instructions are found for line 8 on page 4 of Instructions for Form 2210 (2018).

The instructions for figuring the previous year's tax are complicated for the 1040 (much easier for the 1040A, as you see). The last year's income tax for a schedule 1040 filer is the sum of lines 56, 57, 59, 60a, 60b, and 62 (on the 2017 1040), less a number of adjustments (see the box on the upper right of page 4 on the 2210 instructions).

So the answer to your question depends on what you were referring to. Note that line 57 is the SE tax (self-employment) paid in the previous year (assuming that you are looking at your 2017 1040). So the answer is YES to using the SE tax assessed in the previous year for the "taxes paid last year" if you were self-employed in the previous year. But if you were an employee in the previous year, then the answer is NO because the lines I refer to above do NOT include either the employee portion or the employer portion of the SS and Medicare taxes paid on behalf of the employee. 

As for your final question, " if you start a tax year with taxes withheld, then change to 1099 income, will you still get hit with a penalty?", the answer is simply: you may be hit with a penalty is you do not pay enough estimated tax according to the instructions, whether or not you were previously employed by someone else or self-employed.

However, if you count on your fingers, you will realize that the amount of tax that you are assessed for the year on the 1040 will appear to be larger for the self-employed for purposes of estimated taxes, because the prior year tax includes self-employment taxes but does not include SS and Medicare taxes paid as an employee.

And lest you think that this is an unfair burden on the self-employed, it's not. In the case of the employee, it is the employer not the employee who is responsible for collecting these taxes (generically called "payroll taxes") and sending them to the IRS. Any employer who fails to do so is in a world of hurt with the IRS; thus, sensible employers pay the payroll taxes even if they are losing money otherwise. Asking the self-employed to include the SE tax in the estimated tax calculation just applies the same force to pay on-time to the self-employed as to the employer.

[drdively1]

Sorry I was confusing.  Last year we had NO income from self employment.  

This year we have both types of income.  So I know I will have to pay self employment tax this year.  So I am making some estimated tax payments voluntarily.

I think I hear you saying that I will avoid a penalty if my federal income tax withholding and my estimated tax payments exceed last years federal income tax paid Form 1040 line 15].  I do intend on exceeding that amount.

[tagteam]

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@drdively1 wrote:

...I will avoid a penalty if my federal income tax withholding and my estimated tax payments exceed last years federal income tax paid Form 1040 line 15].  I do intend on exceeding that amount.

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That is essentially correct. As pointed out previously, you can avoid a penalty if you either owe less than $1,000 in tax after subtracting your withholding and refundable credits, or if you paid withholding and estimated tax of at least 90% of the tax for the current year (2019) or 100% of the tax shown on your return for the prior year 2018), whichever is smaller. 

[section223]

I need to clarify. The example that I gave you was referring to figuring your 2017 tax for use in making estimated tax payments for 2018. This is in part because the current instructions for form 2210 are still for 2018 and not yet updated for 2019.

When dmertz referred to line 15 on the 1040, he was referring to the 2018 1040, for use in doing 2019 estimated tax payments. I want to make sure that I did not confuse you.

If you look at his comments, you will note that line 15 on the 2018 1040 less "amounts from Schedule 4 line 59 resulting from other than distributions and certain amounts that might be included on Schedule 4 line 62" is pretty much the same as the 2017 instructions. Indeed, for most taxpayers, the amount on line 15 is sufficient.

I also want to clarify that line 15 is not the amount of tax that you paid, but the amount of federal income tax that you were assessed. After all, it's quite possible that you might not have paid by the end of the year the total amount that you were assessed (hence would owe the balance on line 22 on the 1040).

In short, your general understanding is correct. When I was self-employed and my spouse was employed, I would count on my fingers and toes and estimate our total federal income tax bill (which, as explained above, includes SE taxes but not the employee's SS and Medicare taxes). Then I would figure out how much my spouse was covering with her withholding - this told me how much I had to pay in estimated taxes to cover the difference. I would then figure a percentage of my gross (my consulting job had very low expenses so gross was as good as net) and every time I received a payment to my business, I would place that percentage of the gross in a savings account to be paid quarterly to the IRS using form 1040-ES. It was a simple system that worked for us. 

[dmertz]

Also, the estimated tax payments must be made timely so as to avoid any per-quarter underpayment.  See Form 2210 to see all of the calculations that go into determining whether or not you've made timely payments.

[binnsvera]

I prepared my 2019  taxes on turbotax  never filed them is there any way I can recover my 2019 taxes and finish them and filed them. 

[tagteam]

@binnsvera You will have to use a prior year's product at this point (which must be installed on a computer).

See https://turbotax.intuit.com/personal-taxes/past-years-products/

[mirthafarkouh]

can i contact you to tell you what i want with the state refund for 2021 to be partially apply to 2022 just the es due april 15 2022 or one quarter of the refund

[BillM223]

"can i contact you to tell you what i want with the state refund for 2021 to be partially apply to 2022 just the es due april 15 2022 or one quarter of the refund" - TurboTax is a DIY product, that is, we in the Community don't prepare your return, you do.

If you have a refund on your 2021 return, then you have to option to tell TurboTax what do do with it. Certainly, we in the Community have no idea what your first quarter estimated taxes will be, since we cannot see your private tax data in any case.

When you get to that part of TurboTax (asking what you want done with your refund), at that point you can ask us any tax advice questions related to your refund.

[VolvoGirl]

To apply your state refund to next year, enter it under

State Taxes tab

And keep continuing and stepping through the interview about a dozen or more screens and it will finally ask how much you want to apply.  It is probably one of the last questions in the state section.