Going from a 1099 to W-2 job, must I pay estimated taxes?

Question

In 2018 my spouse worked full-time on W-2, and I worked entirely on 1099. She had taxes withheld, but circumstances prevented me from paying any estimated taxes, so we'll certainly have a substantial tax bill.

This year, we'll both work full-time on W-2. Her income will be about the same as last year, but mine will be about double what mine was. I read about the requirements for making estimated tax payments, but I'm still confused how it applies in our case.

Does it seem that I'll be required to make estimated tax payments in 2019?

Answer 1

For this year, you should not need to make estimated tax payments. Tax withheld from your paycheck (W-2) will be treated as having been paid evenly throughout the year. Your major liability would be if you do not have enough withheld to pay, in which case you could suffer an underpayment penalty. You can avoid this by meeting the Safe Harbor provision: ensuring that you have withheld at least 90% of the tax owed for this year, or 100% of the tax for last year. In some cases you can correct for low withholding by adjusting your W-4 at the end of the year to have significantly more taken from your paycheck - it may be worth checking your status in November and see if you think you may be underpaying. (Note that the rules are slightly different for high-income filers.) Avoiding the Underpayment Penalty for Quarterly Estimated Tax Payments

You may still need to make estimated payments if you have large amounts of other income (capital gains, for instance, or possibly residual 1099 income) that would increase your tax liability dramatically, but this is somewhat unusual.

For last year, you will very likely owe penalties and should work that out as soon as possible to minimize them. Note that you may not necessarily owe penalties if you fall into the Safe Harbor for last year, which would be based on your tax situation for the previous tax year. That is, if your wife's withholding is sufficient (and your 1099 income is low enough) then you may not have needed to make the estimated payments after all. Remember to account for the self-employment tax as well.

Answer 2

This year, we'll both work full-time on W-2... I'm still confused [about] estimated tax payments [and] how it applies in our case.

Let's say you make 90k and your wife makes 90k.

Each W-2 will have tax witheld on your income (90k) unless you fix it.
You and your spouse should both go to your payroll departments and ask how you can fill out your W-4 so your taxes will be withheld based on your joint income (90k + 90k = 180k). Resubmit your W4 based on their answer.

If you do that, I believe enough taxes should be witheld that you won't need to mess with estimated tax payments.
If you have other income in 2019 (like a 1099 from 2018, rental income, etc.) that can change things.

Answer 3

You should not need to make estimated tax payments as a W-2 employee - just adjust your W-4 withholdings to avoid an underpayment penalty. The requirements for avoiding an underpayment penalty are if you withhold (or prepay) at least:

• 90% of your total tax bill for the current year OR
• 100% of your total tax bill from the prior year

So if you are making more than you did last year, more than likely you will withhold more than your tax bill from this year, though the self-employment tax might make it closer.

Just to be safe, I would project out your total income for the year, subtract out the standard or itemized deductions and any tax credits, calculate your tax due based on the tax tables, and make sure you are withholding enough each period to get close to the estimated tax due. 10% should be enough cushion to avoid a penalty.