My husband and I both do work on the side (of my regular, salaried job) as independent consultants throughout the year. So far we've made about $10,000 -- so we know we have to pay estimated tax at least on that at least.
But there's a possibility we'll make up to 30,000 more over the course of the year -- but it's hard to know for sure what the rest of the year will look like. My husband may get a full time job.
SO... should we base our April estimated taxes on 40,000?? (It's about $2500 per quarter.)
WHAT HAPPENS if we end up making a lot LESS than that... are we still obliged to pay $2500 every quarter?
What happens if we win the lottery and suddenly have to pay a lot more than that??
It seems crazy to me that you are supposed to guess how much money you'll make all year in April to determine estimated tax payments.
I know you can use the Annualized method, but that still assumes you know how much you'll make total -- and just divide it differently.
Help?
2007-04-12 13:10:12 · 4 answers · asked by Alexa 2 in Business & Finance ➔ Taxes ➔ United States
Some additions... Do you have to explain to the gov't why you changed the amount? Also, can you pay 90% of last year's liability, even if you know that this year's will be significantly more? Thanks!
2007-04-12 13:25:37 · update #1
About paying 90% of last year's tax liability instead of projecting for this year... I thought that you have to pay a fine no matter what if you owe over $1000 come tax time, so if you base estimated tax on last year's income, wouldn't you risk still underpaying?
2007-04-12 17:39:27 · update #2
you are obviously a lay person and that's OK..... what i would suggest is that you pay 100 percent of your 2005 tax liability divided into four equal estimated tax payments. you will not incur any underpayment penalties and will save yourself a headache. the form required is 1040es and you will complete the short method (partiii)the due dates for those installments are march 15,June 15, September 15 and January 15,2008
2007-04-12 22:02:08 · answer #1 · answered by amazed 3 · 0⤊ 0⤋
Just make sure you pay in at least 100% of last year's liability. This way you will not be subject to any underpayment penalties. You would have to pay the balance due by 4/15, but you wont pay penalties.
Sounds like this is your first year you are both self-employed. For 2008 you can use 2007 as a guide as to your tax liability and how much you should pay in quarterly. If you overpay, you can always have it applied towards the next year, or have the money refunded to you. The payments are not set in stone and you are not obligated to pay the same amount, nor do you have to explain why the amount changed.
2007-04-12 15:03:15 · answer #2 · answered by tma 6 · 0⤊ 1⤋
If your income significantly changes from your original estimate you can adjust your estimated taxes up or down throughout the year. You do NOT need to make 4 equal payments.
As long as you pay in 90% of your total tax liability for the year OR 100% of the PRIOR year's tax liability you won't be facing any penalties for underpayment of estimated taxes. Of course, make sure you set aside enough to make up any shorfall on April 15th.
2007-04-12 13:16:04 · answer #3 · answered by Bostonian In MO 7 · 0⤊ 0⤋
Take your best guess. Just because you think in April that you'll pay in $2500 each quarter doesn't mean you have to do so if your estimate changes. You take a new guess each quarter, and pay based on that amount so you'd have enough paid in by the end of the year.
2007-04-12 13:19:43 · answer #4 · answered by Judy 7 · 0⤊ 1⤋