Paying quarterly estimated taxes
safe tax harbors tougher to navigate
The safe harbor is a little
choppier, however, if you
make a lot of money.
your previous year's adjusted gross income was more than $150,000
(for married couples filing jointly and single taxpayers; $75,000
for married taxpayers filing separately), and you want to base your
estimated tax payment on the prior year's amount, you'll have a
higher safe-harbor percentage to meet.
For 2009 estimated payments, the safe-harbor target for a high-earning taxpayer is 110 percent of the filer's 2008 tax bill. That means if your adjusted gross income on that previous return was $150,000 and you ended up with a $30,000 tax bill, the IRS expects you to pay $33,000 -- $30,000 plus 10 percent -- in 2009 via estimated and withholding taxes to guarantee you don't encounter additional IRS charges in penalties and interest.
both in a couple earning or
people holding multiple jobs,
the salary cap is not as out
of reach as it may seem, especially
if they had a good investment
or sold a piece of investment
property during the year,
too," says Durand.
Stimulus changes to safe harbor
Small businesses were given a bit of a break
in connection with the safe-harbor numbers,
thanks to the American Recovery and Reinvestment
stimulus bill signed into law on Feb. 17.
For 2009, individuals who get
most of their income from a small business
don't have to make estimated payments based
on 100 percent of their 2008 returns to avoid
penalties and interest. Instead, the new law
allows these filers to pay 90 percent of the
prior year's taxes.
To qualify for this lower safe harbor, your adjusted gross income must be less than $500,000; you must employ, on average, 500 or fewer workers at your business; and you must be able to show that more than 50 percent of your gross income on your prior year's return was from your small business.
"Most small-business owners pay tax on their businesses through their own personal tax returns, so this could help," says Barbara Weltman, attorney and author of J.K. Lasser's "Small Business Taxes 2009."
only when you earn
A large estimated tax bill
can take a big bite out of
even a wealthier earner's
wallet, despite being
spread out in four payments.
There is, however, a way
to postpone, if not avoid,
the tax pain.
Although the IRS will always take your money early, you don't have
to make estimated tax payments until you have income on which you
will owe the tax.
of your untaxed income comes
in one quarter (like stock
dividends paid at year's end),
or you operate a business
where income fluctuates throughout
the year, you should consider
paying your estimated taxes
under the annualized income
method allows you to take
a look at each quarter independently
and pay the tax in the quarter
that you earned it,"
says Durand. "Say your
job is one where most income
is in the summer, such as
landscaping, rather than the
winter; you want to pay the
taxes when you have the money."
With this approach,
your required estimated tax
payment for one or more periods
may be less than the amount
figured using the four-equal-payments
method. To find that out,
you'll have to complete a
work sheet, found in IRS
Publication 505, Tax Withholding
and Estimated Tax.
Sole proprietors need an additional
work sheet found in IRS Publication
505 to determine annualized
self-employment taxes that
are included with the estimated
And you'll need to file Form
2210 with your annual return to explain why you
didn't send in the expected equal payments, says Durand. This will keep the IRS,
which assumes you earned the money equally during the year, from
charging you an underpayment penalty and interest for not paying
enough in a particular filing quarter.
"It is a little more
complicated," Durand says. "But for cash flow, it's better
and it puts the tax in the quarter when it is earned."
to avoid estimated filing
Does the prospect of struggling through work sheets and filing even
more tax returns make your head spin? There is an alternative.
If you have
wage income in addition to
untaxed earnings, file a new
W-4 at work and ask your boss
to start taking out more payroll
taxes to cover any shortfall. This strategy also works for couples who file jointly but where only one spouse has wage income subject to withholding.
pay will be a bit lighter,
but you'll be off the hook
for estimated tax payments.
Updated: June 12, 2009