How do I pay in quarterly taxes when taxes aren't held out of a paycheck, and part of the paycheck is considered "non taxable housing allowance" from a church?

[kaylahill620]

In March of this year, my husband took a full time position at a new church. We currently live in Texas, and this church is in Louisiana. He has no taxes held out of his check, and part of the check is a housing allowance that isn't taxed at all. We've never been in a situation where taxes were not held out of our paychecks and this is all new territory that I know nothing about. How do I pay in our quarterly taxes, or begin to even know WHAT those taxes should be, and does living out of state make a difference? I don't want to get into trouble come refund time.

[Opus 17 · Accepted solution]

Start by reading this.

http://www.ecfa.org/PDF/2016-Preparing-Tax-Returns-For-Clergy.pdf

Your husband owes 15% self employment tax on the net income (housing allowance AND wages) and you will jointly owe income tax on your combined taxable income after taking your job (if any) and your personal and family deductions, dependents, etc into account.  That is likely to be another 15-25%.  (The housing allowance is subject to SE tax but not income tax.)

You can reduce his income subject to SE and income tax by deducting work-related expenses like mileage and supplies that are not reimbursed by the church.  These expenses can be deducted twice in turbotax, from taxable income and from SE income, but you need to be using Turbotax installed on your own computer to do this, and you need to reduce the deductions according to the Deason rule as explained in the linked PDF.

You can use the Turbotax TaxCaster to estimate the tax you will owe, or you can use form 1040-ES and do it manually.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

https://www.irs.gov/uac/form-1040-es-estimated-tax-for-individuals-1

Once you determine his taxable income and what you owe, you can make the payments electronically at www.irs.gov/payments.  You can use a credit card (and pay a service fee) or have the money debited from a checking account for no service fee.  Or, you could increase the withholding from your own job (decrease your allowances and/or specify an additional amount to withhold) to cover the amount owed, if you plan to file married filing jointly.  

Here are some other things to read:

https://www.irs.gov/uac/about-publication-517

Clergy FAQS https://ttlc.intuit.com/replies/3302256

[Opus 17]

If you don't want to do any hard math now, a rough estimate is that you owe 15% of his wages Plus Housing, plus 25% of his wages only, in federal payments, and 4% of his wages only, in LA payments.

The tax payment for the first quarter (January-March wages) was due April 15 so it's late.  The second payment (on April-May wages, due June 15) is also late.  The third payment (June-Aug wages) is due Sept 15 and the 4th payment for Sept-Dec wages is due January 15, 2018.  (The dates are correct, it's not 4 equal quarters.)

If this is the first year of owing estimated payments, you should be able to avoid penalties for late payment if the amount you pay in (from your withholding and his estimated payments) is at least equal to your overall tax liability from last year.

[kaylahill620]

Yikes. So given that this is our first encounter with having to pay in our own taxes, they should be fairly lenient as far as late penalties? We've been trying to ask an accountant for months now on what to do, submitted our 2016 returns to him and everything. He just today responded saying we shouldn't have to pay in anything and still get a refund, due to EIC, Child Tax Credits, etc. And I thought that was really sketchy so I came on here to ask (which I should have done first) and get some real answers. Thank you for responding.

[Opus 17]

Well, the rules for when you owe an underpayment penalty are a bit complex, start here. <a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc306.html">https://www.irs.gov/taxtopics/tc306.html</a>

Most of the time, someone who switches from a W-2 withholding to owing their own payments, will fit one of the penalty exceptions in the first year.  (That's not guaranteed though.)  The bigger problem is potentially owing several thousand dollars in April not realizing you should have been paying all along.

Depending on your overall income level, other jobs, kids, etc., that could affect the amount you owe considerably.  Only someone who knows your income numbers (you or your accountant) can know for sure.

[Opus 17]

Living in TX (no state income tax) but working in LA, means that your husband will owe state income tax on his income earned in LA.  He would need to file a non-resident return at tax time, and will also likely need to make estimated payments to Louisiana. You would have to check their web site to see how to make payments.

Depending on how the non-resident return works, you may need to file jointly for your federal tax and married filing separately for his LA state income tax, to keep from having your Texas income taxed in LA.  But we can deal with that later.