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My wife and I have always claimed 0 dependants and gotten the maximum amount taken out of our checks every week. I recently realized that in essence, we've been giving the government interest free loans for years. I decided that I would rather claim 10 dependants and withhold NO taxes. If I instead invested that money into a secure high interest savings account (such as a 4.5% savings account) I could instead reap the benefits of my earned income, and pay Uncle Sam his due January of the following year. I also wouldn't have to worry about waiting for the inept IRS to give me my refund, as it would be on hand.

Well, someone informed me that this doesn't work. They said Uncle Sam feels like he should have his portion throughout the year, not at the end. So my question would be, is there any way to LEGALLY do this? If I have to file a W-4, is there a way to possibly pay quarterly, so that I can earn interest on it as long as possible, then turn it in at the last minute?

Thanks!

2007-12-04 15:31:17 · 3 answers · asked by Chris W 1 in Business & Finance Taxes United States

3 answers

No, there's no legal way to do that if you are an employee. You'd have to be self-employed to be able to make quarterly payments. And if you try it, the IRS will be fully aware of it when they see the wage sheets coming in from your employer and the 1040-ES forms with your estimated payments. It would take a pretty convincing argument to dodge the $500 penalty for a fraudulent W-4 filing and the likely Lock Letter that would force withholding at whatever the IRS stipulated in the letter. That's usually Single and 0 or 1 at best, regardless of what you would otherwise be legally entitled to.

Tax is actually due when the income is earned, NOT on the filing deadline date. Employers withhold tax each pay period and pay it in as often as every week depending upon the size of their payroll. Congress saw fit to give self-employed folks a break on the administrative load of having to pay taxes every couple of weeks and that's where the quarterly estimated payments come in for the self-employed.

What you CAN do legally is adjust your W-4 allowances so that your withholdings through the year place you in one of the Safe Harbor exceptions to avoid penalties and interest for underpayment. Dump the additional pay into that interest bearing account each pay day. I do it that way and shoot for a $900 debt at filing time, which of course I pay at the last possible moment to avoid the penalties.

There are 3 Safe Harbor exceptions.

1. Total due is less than $1,000.

2. Total paid in is equal to 90% of the total tax liability for the year.

3. Total paid in is equal to 100% of the PRIOR year's tax liability.

Rule #3 is the one that most self-employed folks use. And it's the one that will usually allow you to avoid any penalties or interest if you have a sudden taxable windfall and wait until April 15th to pay up. I had exactly that situation last year when I sold some properties. I had to cut a check for well into 5 figures but paid no penalties because I had paid in 100% of the prior year's liability through my W-2 job.

2007-12-04 15:39:38 · answer #1 · answered by Bostonian In MO 7 · 4 0

BOston nailed the answer 100% correctly AGAIN!

2007-12-04 15:48:43 · answer #2 · answered by Hank Roitman, EA 4 · 1 0

You will pay fines if you owe more than $1,000 when you file your taxes.

2007-12-05 12:49:31 · answer #3 · answered by Gary 5 · 0 0

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