Calculating Self Employed Quarterly Tax for someone who has both W-2 and 1099 in 2024

[inspiration]

Context: I had W-2 income this year only for January. Between February and June, I received unemployment benefits from which federal income tax has been withheld. In June I started a 1099 work for which I received paychecks in July and August so far. Due to the nature of my current job, it's not possible for me to accurately estimate my income for rest of the year.

Q1: In my understanding, the simplest thing would be to pay 110% of my last year's tax liability which is line 24 on 1040 (my household income for married filling jointly was more than 150K). Is this understanding correct? This year, I am not anticipating earing more than last year.
Q2: Since I started 1099 job only in June, I did not have to pay any estimated taxes for Q1 and Q2. So, is it okay if I pay 110% of last year's tax liability in two chunks, one in Q3 (Sep 16) and one in Q4 (Jan 15'2025)? Do they have to be equal chunks?
Q3. I am deducting the following's from my tax liability this year - Federal income tax, social security tax, Medicare tax withheld from my W-2. I am also deducting the amount withheld from my unemployment benefits. Is it correct?
Q4: I am using this formula to calculate estimated taxes for Q3 (Sep 16) and Q4 (Jan 15, 2025) --> (110% of last year's tax liability [Line 24 on 1040] - this years total tax withheld) / 2. Please confirm if this is correct. 

[carolineb · Accepted solution]

Hello @inspiration! This is definitely a confusing topic when you have both W2 and 1099-NEC income. 

The easiest way to explain it is this: Your W2 wage income and your unemployment have both had federal income taxes withheld on the amounts received. So essentially, the tax liability on those amounts is already covered. You will want to make estimated payments based on your 1099 income only. 

You are correct in stating that you were not required to make a Q1 or Q2 estimated payment, since you started working in June, so you will want to calculate your 1099 earnings from June through August to include on a Q3 payment.  You did not mention any expenses paid out of pocket on your 1099 earnings, but if you do have expenses you will want to calculate your net income for those months, and pay estimated taxes on the net earnings.

A good rule of thumb is to send in 25% of the net income as an estimated payment (10% for the lowest federal income tax bracket, and 15% for the SS and Medicare taxes due on that income).  If your income puts you into a higher tax bracket, you would up the federal income percentage based on your tax bracket (2024 income tax brackets). The fact that you mentioned paying 110% of your prior year's tax liability leads me to believe that your taxable income last year exceeded $150,000, so the federal percentage of your estimated tax payment will probably exceed the lowest bracket of 10%.

You also did not mention which state you live in. If you live in a state that has no state income tax such as TX or NV, then no need to make estimated state payments. However, if you live in a state with an income tax, you will want to find the state income tax rate for your income level and make estimated payments to the state based on that percentage as well. 

And lastly, making estimated payments to cover 110% of your prior year liability would definitely exempt you from paying any penalty on underpayment, but may not cover your tax liability for the current year. Best to calculate the estimates based on net income earned and the tax bracket that you fall in to avoid any large amounts due at tax time. 

If this post answers your questions, please give me a thumbs up! Thanks for reaching out! 

[inspiration]

@carolineb  Thanks four your response! I live in a no-income-tax state and I am projecting to be in 22% tax bracket this year.

1. With that in mind (+W-2 and unemployment as mentioned before), according to your rule of thumb, I should send 22% + 15% = 37% of my June - Aug 1099 income this quarter  (by Sep 16) I think. Please confirm if I got it right. Is there any rule of thumb for deducting standard deduction and child care credit from this quarterly tax estimation? Also, let's say I don't pay the required/rule-of-thumb % in Q3 (for example I pay only 8% of my Q3 income). But I make up for this in Q4 payment. Will I still get penalty for Q3?

2. If I take safe harbor route (110% of last year) to avoid penalty, does it make any difference paying in two chunks in Q3 and Q4 vs paying all in once in Q4?

Bottom-line is, I am trying to understand what minimum payment I should make in Q3 to avoid any penalties.

[carolineb]

Great tax planning by living in a no tax state 🙂

1. Your calculation of 37% is correct. No simple way of figuring in the standard deduction and child care credit as they will reduce your federal income tax liability but NOT your SS and Medicare liabilities. I generally consider any refund of those amounts to be a bonus to the self employed taxpayer, but theoretically you can divide those deductions and credits by 4 and apply the amount of income for federal income tax purposes only. 

As for the second part of your question, the IRS considers all of your income to be received equally throughout the 4 quarters. So if you underpay for Q3 and make up the difference in Q4, you may still receive an underpayment penalty, even if you are due a refund on your return. That being said, there is a section in the Other Tax Situations section of TurboTax regarding Underpayment Penalties that you can show the IRS when your income was received throughout the year. For example, a lawn care maintenance company might show little to no income in Q1, lots in Q2 and Q3, and less in Q4. However, if the IRS decides to audit you based on how you reported income received, you need detailed records of how you calculated the income received for each quarter. 

2. The safe harbor method of paying 110% of your prior year liability will avoid any underpayment penalty according to my resources, which I guess is why they call it the safe harbor method!

If this post answers your questions, don't forget to hit the thumbs up button! And thanks for all of your feedback, much appreciated

[inspiration]

@carolineb Thank you so much! One last question, my Gen AI app gave me the below info. Is it correct?

"Equal payments not strictly required for safe harbor: While the IRS generally prefers equal quarterly payments, the safe harbor rule doesn't strictly require equal payments for each quarter."

If the above is true, that would mean even if I pay the safe harbor amount in Q4 (Jan, 2025 deadline), I still should not get any penalties. My first goal here is to avoid the penalties 🙂 

[carolineb]

While it pains me that Gen AI is giving you correct information, I must take the high road and give credit where credit is due. Safe harbor means no penalties. But don't forget that you and I both like pizza and Gen AI can't eat, so I win

[inspiration]

@carolinebThank you for the confirmation! You definitely win this round—your expertise has made everything so much clearer in just three responses. With Gen AI, it would have taken me a lot of back and forth to get to the same point, and it wouldn’t provide the peace of mind that comes from getting advice from a human expert! And yes, pizza is definitely a win-win for both of us! 🍕