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Level 1

Regarding the "safe harbor" rule of paying estimated taxes of 110% of last year's tax liability, is last year's tax liability FIT + SS Tax + Medicare Tax?

Spouse is W-2 and I am 1099.  I am trying to figure out  what would be the 110% amount to use for estimated taxes.  Is the base my spouse's FIT only plus my Self Employment tax or is it spouse's FIT, SS, Medicare tax plus my SE tax or is it spouse's FIT only and my FIT only?
3 Replies
Level 3

Regarding the "safe harbor" rule of paying estimated taxes of 110% of last year's tax liability, is last year's tax liability FIT + SS Tax + Medicare Tax?

it's complicated so I'll list the rules.  

start with line 14 on your 2019 1040

add the following other taxes from schedule 2 of 1040

Schedule 2 (Form 1040 or 1040-SR), lines 4, 6 (additional
tax on distributions only), 7a,* 7b, and, if applicable, the
Additional Medicare Tax (Form 8959) and/or Net Investment
Income Tax (Form 8960) on Schedule 2 (Form 1040 or
1040-SR), line 8, and any write-ins on Schedule 2 (Form
1040 or 1040-SR), line 8, with the exception of:
• Uncollected social security and Medicare tax or RRTA tax
on tips or group-term life insurance (identified as “UT”);
• Tax on excess golden parachute payments (identified as
“EPP”);
• Excise tax on insider stock compensation from an
expatriated corporation (identified as “ISC”);
• Look-back interest due under section 167(g) (identified
as “8866”), and under section 460(b) (identified as “8697”);
• Recapture of federal mortgage subsidy (identified as
“FMSR”); and
• Interest accrued on deferred tax under a section 1294
election for the year of termination (see Form 8621, Part VI,
line 24, and the Instructions for Form 8621). Also, subtract
the amount from Form 8621, line 9c, that has been entered in
brackets to the left of Form 1040 or 1040-SR, line 16.
* If you’re a household employer, include your household employment taxes on
line 2. Don’t include household employment taxes if both of the following are
true: (1) You didn’t have federal income tax withheld from your income, and (2)
You wouldn’t be required to make estimated tax payments even if the
household employment taxes weren't included.

subtract the following credits from schedule 3

you claim on your tax return.
• Earned income credit.
• Additional child tax credit.
• Refundable part of the American opportunity credit (Form 8863,
line 8).
• Credit for federal tax paid on fuels.
• Health coverage tax credit.
• Premium tax credit (Form 8962).
• Credit determined under section 1341(a)(5)(B).

 

 

the net is the amount for the 110% test.

 

for many taxpayers, the net is going to be the same as line 16 on form 1040

Level 1

Regarding the "safe harbor" rule of paying estimated taxes of 110% of last year's tax liability, is last year's tax liability FIT + SS Tax + Medicare Tax?

Just to be sure... If Line 24 ("Total Tax") on the 2020 1040 is the amount on which to multiply by 110% to get my minimum amount of estimated taxes to pay for the 2021 tax year, what taxes are included in the 110% amount?  My projected "Self Employment Taxes" + my W-2 spouse's projected to be withheld amounts of FIT + Medicare Tax + SS Tax?  I was a little unclear if my spouse's Medicare and Social Security taxes counted in the 110% formula.  Thanks!

Employee Tax Expert

Regarding the "safe harbor" rule of paying estimated taxes of 110% of last year's tax liability, is last year's tax liability FIT + SS Tax + Medicare Tax?

 

Yes, you would start with Line 24 (Total Tax) which will include your projected "Self Employment Taxes".  Then you could adjust for any withholding you expect during the Tax Year. (W2 for spouse, any SS withholding etc.) This should give you a reliable figure as base for your estimated tax. Keep in mind, you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

 

Below are links to IRS and Turbo Tax that have helpful worksheets.

 

Estimated Taxes | Internal Revenue Service

 

Calculating estimated taxes

The calculation is based on an estimate of current income. To help with the estimation, you can start with the previous year's federal tax return. Look at the taxable income, tax paid, credits and deductions from the previous year and compare to the current year’s numbers. The Form 1040-ES package includes worksheets to help you account for differences between the previous and current year’s income and calculate the tax you owe.

 

Generally, an underpayment penalty can be avoided if you use the safe harbor rule for payments described below. The IRS will not charge an underpayment penalty if you pay at least:

  • 90% of the tax you owe for the current year, or
  • 100% of the tax you owed for the previous tax year.

This rule is altered slightly for high-income taxpayers. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

However, if you do not pay at least that much via quarterly estimated payments, you may be subject to an underpayment penalty.

 

Your state will also have estimated tax payment rules that may differ from the federal rules.

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