...sigh...

Trying to help my girlfriend, she is a far better hairdresser than an accountant.

Last year she opened her new business and did not keep records as organized as her newly hired accountant requested. He fired her...by ghosting her. Dick. I get “why” especially this time of year, but at least man up and return her panicked calls.

I digress.

I’m working with her to get organized in 2021, but at top of mind is the upcoming 2021 Apr 15th estimated tax she needs to pay.

How is that calculated?

Is there a penalty for over/under paying?

Is there anyway else “tax wise” she should be thinking about?

Thanks all.

There will be more detailed answers coming along shortly, but a quick answer is to figure her expected income then subtract her expected expenses and use her standard deduction to come up with her estimated taxable income. Use the appropriate tax table (Single, MFJ, etc)to determine her income tax.

The quickest way to figure her self-employment tax (added to her regular tax) is multiply her net self-employment income by 15%. Take that number and add it to her other tax and you'll have your estimate on how much she'll owe for the year. Divide that estimate by 4 and you'll have the amount that needs to be sent each quarter.

Hope that helps!

Edit to add:

If she has less that $1k of tax owed to the IRS come tax time she won't have any penalty. Different states have different thresholds but most follow the IRS in this regard.

Tax Day has been extended to May 17 this year, if that helps.

quote:

Originally posted by Fredward:
Tax Day has been extended to May 17 this year, if that helps.

Agreed. But Q1 estimated tax is still Apr 15

Time-value-of-money says one should always want to minimize the estimated tax payments and just write whatever check with the return later...but many people either can't rely on having ready cash to potentially write a large check when filing and/or prefer to get their own money back as a 'refund'.

Anyway, after you've figured out what you might need to pay in to cover this year's actual tax bill (see above), I believe there is also a safe harbor that avoids penalties as long as the estimated tax payments over this tax year is equal to or greater than your tax bill for the immediately prior year.

So another potential calculation would be to divide your friend's total tax bill for 2020 by four, and compare that to the above number. If 2020/4 is lower, your friend would have the option of making those lower estimated tax payments based on prior year's bill, and have no penalty.

Note: tax advice for free, over the Internet, is not to be confused with paid professional advice. If this sounds like something your friend might want to pursue, chat with a tax pro.

I've never believed in giving the Government interest free loans, so the whole 20+ years I owned my company I usually sent in 2 estimated tax payments and let it go at that. Usually one in May or June and one in September.

As long as you paid something like 90% of your tax liability there are no penalties of any kind.

No penalty for over payments.
My wife and I are self employed and have income that can vary a lot each year.
We guestimate our income each quarter and send in 20% to the Fed's and also the state rate to our state.
At the 4th quarter we have our CPA take a quick look at where we actually are and they tell us pretty close so we can make a more accurate final payment.
If you have over payed it gets back to you when you file so you haven't lost anything. Interest rates are so low now that I don't worry about lost opportunity money, it's just reassuring to know I don't have to cough up a lot when I file the return.
If I have under-payed some but made payments the same or more than last year then I just pay the difference. Even if I underpaid, the penalty and interest isn't enough to worry much about.

quote:

Originally posted by Flash-LB:
As long as you paid something like 90% of your tax liability there are no penalties of any kind.

I'm a CPA and covered up with tax work. Needed a mental break and saw this thread. Hopefully my post isn't cryptic (blunt or rude).

Simply having 90% paid in by the due date will not avoid ES penalties. Payments have to be made though the year to avoid penalties.

As a CPA, I can't tell someone to not make a required filing, but unless she has a ton of tax, the penalty for missing the April payment might not be that harsh (and might be less than an accountant would charge to make the computation). Perhaps do a catch up payment once she gets her 2020 tax return prepared (which I'm guessing will be by May 15)

220-9er suggestion has a lot of merit - if she has cash, just guesstimate Q1 then true up when she files her 2020 return.

quote:

Originally posted by SR:

quote:

Originally posted by Flash-LB:
As long as you paid something like 90% of your tax liability there are no penalties of any kind.

I'm a CPA and covered up with tax work. Needed a mental break and saw this thread. Hopefully my post isn't cryptic (blunt or rude).

Simply having 90% paid in by the due date will not avoid ES penalties. Payments have to be made though the year to avoid penalties.

So I guess you as a CPA and the IRS differ in their opinions of whether or not to charge a penalty.

https://www.irs.gov/businesses...oyed/estimated-taxes

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

quote:

Originally posted by Flash-LB:

quote:

Originally posted by SR:

quote:

Originally posted by Flash-LB:
As long as you paid something like 90% of your tax liability there are no penalties of any kind.

I'm a CPA and covered up with tax work. Needed a mental break and saw this thread. Hopefully my post isn't cryptic (blunt or rude).

Simply having 90% paid in by the due date will not avoid ES penalties. Payments have to be made though the year to avoid penalties.

So I guess you as a CPA and the IRS differ in their opinions of whether or not to charge a penalty.

https://www.irs.gov/businesses...oyed/estimated-taxes

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

That is paraphrasing the rule. Please feel free to spend about 3 hours working through the instructions for Form 2210.

I realize that tax stuff is complex but I really wonder why a member would attack me when I'm trying to be nice. I worked ~14 hours yesterday and I'll be working until 1 or 2 am today. Guess what, on quarterly estimated tax payments - first quarter payments are due April 15th. (Unlike the due date for the Form 1040, the deadline for ES payments did not change.)

Y'all send an email to Flash and tell him thanks... after his kind and thoughtful response, I'll just make this the last tax question I'll respond to this year.

I would have been fine had Flash asked why my answer differed from the info he quoted. It's postings like this that cause Appliance Brad to drop off for an extended time and why he no longer responds to members questions. (I know because I've talked with him.)

This message has been edited. Last edited by: SR,

quote:

So I guess you as a CPA and the IRS differ in their opinions of whether or not to charge a penalty.

I too need a break as a CPA doing taxes. "Simply having 90% paid in by the due date will not avoid ES penalties. Payments have to be made though the year to avoid penalties." is correct.

One trick I ask my clients to do for the first (Apr 15) payment is to make it for the prior year if the tax return has not been filed. Any excess then is rolled to the coming year.

^^^^^^^^^^^^
I have used a CPA for over forty years. I am on my second one at present. He is well worth the money for filing my taxes and I make sure to thank him. The biggest issues for me are when the IRS does something out the ordinary. James1 on this forum really went the extra mile for me.

I think Flash unknowingly answered the question himself:

quote:

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.

quote:

Originally posted by SR:

I realize that tax stuff is complex but I really wonder why a member would attack me when I'm trying to be nice.

Well said Sir!

Hey Flash, you are a Butt Head. You quote a single paragraph from an IRS publication and think you know more than an ACCREDITED PROFESSIONAL. Please know that absolutely nothing administered by the IRS can be summarized in a single paragraph. The instructions for Form 2210 runs to ten pages.

https://www.irs.gov/instructions/i2210

To the original poster's concern, just do the best you can. Realize that the Estimated Tax Penalty is roughly equivalent to paying 6% interest for the portion of the year that your estimate was underpaid. IF you don't qualify for an exemption. At this time of year use the SWAG method - Scientific Wild Assed Guess.

Best wishes to all tax paying Americans in this season of woe.

I was also basing it on 20+ years of experience doing exactly what I said and what the IRS said.

But what do I know?

quote:

Originally posted by Flash-LB:
But what do I know?

You know enough about this place to realize it's time to cool it. Perhaps you can tell us your profession so we can straighten you out on all your misconceptions about it.

Ronin, Did you get this sorted out? If not, call and we'll chat for a few minutes. My phone number was in the email (sent last week).

Guys -

Thanks to all for the responses here, and in my email. It is sorted.

My apologies for not getting back to the personal notes, I lost my stepdad last week and things have been rather hectic.

Thanks again.