Estimated Tax

[B. White]

This is a general question that I'm surprised I don't see an answer to on the IRS or other websites. This is the first year that I have paid estimated tax quarterly. Most income is from working for myself and I estimated income on the high side, since it was the first year and I didn't know what to expect. I will not file the yearly return before the Jan. 15th payment is due, so I will make a payment. My income is less, due to intentionally working billing fewer hours during Thanksgiving and the first part of Dec. (I did a straight estimation with no vacation, holidays, etc.).

Can the final payment be reduced by submitting less than payment on the payment coupon, or does a new estimated tax form need to be completed and filed with it? Everything I find talks about if you can't pay and just pay what you can. I have it put aside to pay, but would prefer .gov not hold excess until April, however I don't want to do anything that would trigger questions and audits. The difference is not big enough to be worth going and paying a CPA. I will probably just pay it, but would like to know the answer if it happens again with a bigger difference. I may end up having to pay somebody to deal with it next year, since I know the income will increase and there may be some additional expenses

 

[bassboy1]

This is a general question that I'm surprised I don't see an answer to on the IRS or other websites. This is the first year that I have paid estimated tax quarterly. Most income is from working for myself and I estimated income on the high side, since it was the first year and I didn't know what to expect. I will not file the yearly return before the Jan. 15th payment is due, so I will make a payment. My income is less, due to intentionally working billing fewer hours during Thanksgiving and the first part of Dec. (I did a straight estimation with no vacation, holidays, etc.).

Can the final payment be reduced by submitting less than payment on the payment coupon, or does a new estimated tax form need to be completed and filed with it? Everything I find talks about if you can't pay and just pay what you can. I have it put aside to pay, but would prefer .gov not hold excess until April, however I don't want to do anything that would trigger questions and audits. The difference is not big enough to be worth going and paying a CPA. I will probably just pay it, but would like to know the answer if it happens again with a bigger difference. I may end up having to pay somebody to deal with it next year, since I know the income will increase and there may be some additional expenses

The amount on the slip you send definitely needs to match the check. That coupon is basically documenting what's on the check.

Look up the term 'safe harbor rules' to better understand the amount you need to have paid by the end of the year (90% of this year's tax amount or 100% of last year's).

My understanding, and I'm not an accountant, is that as long as the safe harbor rules are met you can decrease your later payments with no penalty. For example, if at the end of the year, you owe $3000 in taxes, and you've already made three $1000 estimated payments, you could skip the 4th payment altogether as the surplus from the first 3 covered that.

The issue arises in the reverse scenario - skipping the first payment, or having the first payment be smaller than the latter ones - then there is a form you have to fill out to justify when that money was made, to prove that the estimate did match the income for that particular quarter.

 

[mrs. hornet22]

Not really sure, but I think if you overpay it will carry over for next year.

 

[B. White]

Not really sure, but I think if you overpay it will carry over for next year.

It will.

 

[bassboy1]

Not really sure, but I think if you overpay it will carry over for next year.

It will.

Or, you get a refund at tax time. It's the same thing as having too much withheld from your paycheck in a W2 job - at tax time, it's due back to you, you then elect whether to carry it forward to get year, or get a refund check this year.

 

[RumarLos]

It would be best to consult the sales tax act of your specific location to see which treatment is correct.

 

[Doug B.]

If you do over pay then you can get a refund, or apply it to the next year's taxes. I try to do this so I don't end up owing at he end of the year. Breaking even would be fine but if I send enough in I will get some back and still be some to pay on the first quarter of the new year. Kinda keeps me from scrambling after a few days off at Thanksgiving and Christmas.

 

[elfiii]

Generally speaking there are 4 estimated tax payment due dates - 4/15, 6/15, 9/15 and 1/15 of the next year. If you are required to make estimated payments the payments must equal your estimated tax liability for the year divided equally between quarters.

For example, if you estimate your annual tax liability to be $8,000 then you must make quarterly estimated tax payments of $2,000 to avoid incurring an underpayment of estimated tax penalty. For further example let's say you only make an estimated tax payment of $1,900 for the first payment. You are short $100 and until you catch that up you will be assessed an underpayment penalty cumulatively.

There is a Safe Harbor election in the case of your income fluctuating during the year called the Annualized Income Installment method.

The other Safe Harbor is if you have paid in 90% of your current year's total liability or 100% of what last year's total tax liability was.

As long as your unpaid tax balance at 4/15 is less than $1,000 you are exempt from underpayment penalty.

If your ultimate tax liability for the year is less than your estimated tax payments resulting in an overpayment you have the choice of having the overpayment refunded to you or applied to next year's estimate. If you elect to apply to next year then your first estimated tax payment for the new year is reduced by the overpayment. If the entire overpayment is not absorbed by the first payment the remainder carries forward to the second installment, etc. etc.. If you're going to continue be self unemployed (joke) then you will definitely want to apply any overpayment for the current year to the next year.

The worst thing you can do is get behind on your estimated tax payments for the simple reason 4/15 is allee allee in come free and that's the due date for any balance due on last year's return. It's also the deadline for your first estimated tax payment for this year. The two amounts combined can be daunting and if you can't cover them both you're definitely in for some penalty and interest on top of the original tax liability.

There's more, but that's the basics.

 

[B. White]

The worst thing you can do is get behind on your estimated tax payments for the simple reason 4/15 is allee allee in come free and that's the due date for any balance due on last year's return. It's also the deadline for your first estimated tax payment for this year. The two amounts combined can be daunting and if you can't cover them both you're definitely in for some penalty and interest on top of the original tax liability.

There's more, but that's the basics.

That is why I had over estimated, since it was my first year doing it and I didn't want to get caught short. I learned last year when I had income from three sources in 2021 and had to pay, plus that first check for estimated taxes at the same time.

I had a significant drop the last quarter of 2022, but went ahead and paid the full amount in Jan. I couldn't figure out if I just needed to change the payment voucher amount based on actual income, or if I needed to fill out and submit an amended 1040es.

 

[elfiii]

That is why I had over estimated, since it was my first year doing it and I didn't want to get caught short. I learned last year when I had income from three sources in 2021 and had to pay, plus that first check for estimated taxes at the same time.

I had a significant drop the last quarter of 2022, but went ahead and paid the full amount in Jan. I couldn't figure out if I just needed to change the payment voucher amount based on actual income, or if I needed to fill out and submit an amended 1040es.

You probably did the right thing and if you're overpaid that gives you some breathing room for this year.

 

[LTZ25]

Most guys on here are CPA's for sure but I know you will save money getting your own accountant , not as expensive as not having one .

 

[LTZ25]

I was talking about the average fishing site info you get , I can tell there's a pro giving great free advice on here , hope I didn't sound to stupid about that .

 

[Elkbane]

But to answer your question, Yes, you can adjust your final 4th quarter estimated tax payment upward or downward based on your final estimated tax liability. Just be sure you work within the Safe Harbor thresholds Elfii pointed out.

Our corporate 3rd party CPA who also prepares our personal tax returns does a "tax projection" every year in mid-December, and we always adjust the final estimated tax payment to match the whole year expected tax liability. They have done that every year since we started our business in 2005.....

Elkbane