Why am i paying a penalty?

[nmpyron]

Hi - I am a contractor with highly variable income (150K - 400K annual) , I pay my estimated taxes @30% rateon time based on the income I receive each quarter.  My husband's company did not withhold sufficient taxes for his portion of the our married filing jointly income, however, according to form 2210, we paid over the annualized minimum requirements.  I got a bit lost in all the 2210 mess, but how to I prevent future year underpayment penalties when my income is so variable and my husband can just check a box on his work forms so has no other control?  What detailed forms in Turbo Tax do I need to go through to understand if I should be asking for a waiver of the penalty?

thank you.  

[Mike9241]

there are safe harbors for 2023 

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There will be no federal penalties for not paying in enough taxes during the year if your 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 payments. 1 is difficult to know until the year end so generally option 2 is the safer option. under the simplified method 25% of the taxes required under whichever option you are using must be paid in each quarter by 4/18, 6/15, 9/15 and 1/15/24.  (so if option 1 25% of 90% which is 22.5%) unless you can show otherwise 25% of you annual withholding is assume to occur in each quarter.

failing this and being subject to penalties you can use the annualized installment income method. (see the AI schedule on form 2210)
this method requires knowing your income and deductions thru 3/31, then 5/31, then 8/31, and finally year end which should be the same as the tax return. the income, deductions and self employment income are annualized. taxes are computed on the annualized amounts and then de-annualized. then you must enter certain additional taxes and credits for the period to get to the net annualized tax. this tax is then deannualized (line 20 of schedule AI).  your tax payments for each period must equal or exceed these amounts to avoid penalties. 

[fanfare]

" ... based on the income I receive each quarter."

Form 2210 requires evenly spread estimated tax installments.

That's why you have a penalty.

What is your 2022 tax ?
If your estimated tax + withholding is each period 25 % of that amount ( x 1.10 if your AGI is over 150,000)
you will avoid an underpayment of estimated tax penalty in 2023.

This is the prior year's tax rule for estimated tax.

April 18th is the due date for the first 2023 Estimated Tax installment.

@nmpyron 

[fanfare]

You can try Schedule AI to reduce or eliminate the penalty,

I found it to be too complex so I gave up.

@nmpyron 

[nmpyron]

i, as a LLC contractor,  made 415K and paid estimated taxes of 130K - which was 30% of what I thought i would get paid

my husband made 400K and his company only withheld 75K on his salary payments.

I think my husband's insufficient withholding was the cause of the underpayment

a) is it worth messing with the extremely confusing 2022 AI form to try and get back the $200 penalty?  

b) is there anything other than increasing the amount my husband's company withholds to avoid this in the future?

c) i cannot may the same payment every quarter because i never know how much i will make (ie this year i am on track to make about 100K, so I cannot afford to make an even spread based on last year's income.)

thx

[Vanessa A]

The easiest way would be to make sure you paid in over 110% of your previous years tax liability.  So, if for 2021 you had a tax liability on line 18 of $30,000, you would need to be sure that you paid $33,000 for 2022. And although technically, you should be able to spread that out evenly over the 4 quarters, you would be best to pay as much earlier in the year as you can.  Also, be sure you make the payment deadlines.  Like the first quarter payment is due on April 18th.  Be sure to pay it by this Wednesday, otherwise it is considered late.  

You can also increase your husbands withholdings by having an additional amount withheld or having him change his W4 to Married but withhold at the higher rate.  His employer probably didn't under withhold for his pay, but when you combine his pay with yours then it wasn't enough. 

[nmpyron]

ah.  well, as i said, i cannot afford to make the payments based on 2022 because my estimated payments will be more than my annual income.  

i'll tell my husband to increase his withholding ... but i would still like to know if i should fight the penalty and fill out the confusing AI form 🙂

thx

[fanfare]

it is estimated tax + withholding.

you can reduce the amount you pay by the amount he pays.

See also the 90% of 2023 tax rule

Whichever is smaller is sufficient.

Form 2210 requires evenly spread estimated tax installments.

@nmpyron 

[nmpyron]

So how do i get around the evenly spread tax payments?  I see how much I get paid by each due date and the pay 30% of that amount.  Can I file for a waiver?  My hours and hourly rates vary by client, so I really don't know how much I'll make until the quarters close.  

[RobertB4444]

In this case the $200 penalty is based on your husband's withholding.  There isn't a whole lot of arguing that you can do with that.

If the withholding was due to a clerical error at your husband's company he can request that they reimburse him for the penalty.  I it was due to an error on your husband's W4 form then there isn't much that you can do.

The estimated payments should be based on the prior year's income.  If your husband increases his withholding and you pay in the rest you should be able to avoid penalties for this year.  Since your income is expected to be down by quite a bit you should not have to pay in as much.

Go to 'Other Tax Situations'.  Scroll down to estimated taxes.  The tool there lets you predict your income for 2023 and adjust the amount that your husband will have withheld.  This should help you to predict the estimates necessary for 2023 better.

@nmpyron