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I picked up a side-gig on March 30th, that pays me at the end of each month, so my first pay check will be towards the end of April, which is in the second quarter. It seems I have two options to make sure I am paying taxes on it:

  1. Make estimated quarterly payments
  2. Have more income withheld from my regular employment

Because this side-gig essentially started in the second quarter, I did not make any estimated payments by the first quarter deadline (April 18th).

Question: If I made quarterly payments for the second, third, and fourth quarters, and the payments were the correct amount, would the IRS still penalize me for not making an estimated payment during the first quarter, even though I earned no income from the side-gig during that time?

2 Answers 2

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If you go with option #2 and you withhold enough extra to avoid an underpayment (safe harbors are summarized here), you won't be penalized. This is by far the simpler option as long as your side gig isn't generating so much income that it becomes impractical.

If you go with option #1, you can avoid a penalty, but you'll have to show that your extra income came after the first quarter, because the default assumption will be that you missed an estimated payment. You would do this by checking box C in Part II of Form 2210, and completing Schedule AI on the same form. Take a quick glance at that schedule and I think you'll understand why option #2 is preferable. It's doable but if you can avoid it, I would.

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    Publication 505 may be helpful. It is updated with tables for the current tax year and has worksheets to help calculate the amount of estimated tax payments required before the full year income is known. Form 2210 is designed to be used after the tax year is over.
    – prl
    Apr 20 at 6:07
  • Thank you @Craig W, this is probably the option I will go with.
    – James Dunn
    Apr 20 at 22:20
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Based on my direct experience (self-employed, married filing jointly), you are not likely to be penalized. As you've noted, you are currently employed and you are currently having taxes withheld. The side gig is providing you additional income.

During the first year of filing that included self-employment taxes, I received a notice suggesting that I file on a quarterly basis, to avoid penalties. For that year, we received a refund and years hence. We have never again received a notice with the suggestion.

Anything you do to ensure that you are paying sufficient tax will prevent warnings or penalties. If you do not adjust the income withheld from regular employment and do not make quarterly payments, you may have to pay additional taxes, and may receive a warning.

This information is qualified and quantified in an IRS document online.

Penalty for Underpayment of Estimated Tax

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. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

"You may" does not mean you will be penalized. It is interesting to note that if you've paid one hundred percent of the tax due the previous year, you don't have to worry about a penalty.

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    "It is interesting to note that if you've paid one hundred percent of the tax due the previous year, you don't have to worry about a penalty." It is 110% of the previous year tax if your AGI was > $150k. Also, this statement is only true if your tax withholding (i.e. not counting estimated taxes) reaches 100%/110% of previous year tax/90% of current year tax. If your withholding doesn't reach that level, then you can still have a penalty if some quarterly estimated taxes were not paid at the required level.
    – user102008
    Apr 19 at 19:33

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