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Last year I had W-2 income and 1099 income. I made $10,000 in real estate commissions. I believe I paid $1800 last year in 1099 tax, but none of it to the best of my knowledge was penalized. I filed an extension in April with $1,800 and filed taxes in July: I got $20 back.

On July 3, 2013, I quit my job that provided the W-2. It looks like I'll be making $15-20,000 of 1099 income this year. Do I need to pay estimated taxes? If so, how do I estimate my taxes? I had $10,000 from two jobs in real estate last year. This year, I have a few service contracts, which will probably bring in $15,000 and $10,000 of real estate commissions, but I'll only have half of the W-2.

Can I just pay the same amount of tax I paid last year from 1099 ($1,800) and wait until the end of this year to pay the rest? I'm told I have two options if I don't want to be penalized,

  1. Estimate to 10% of my income (which is impossible, I don't make much, 10% is a just two jobs.).
  2. Pay 100% of what I paid last year, and then pay the difference at the end?
  • At each estimated payment time you look at what your taxes would be if the rest of the year went like it has so far and send them 1/4 of that. It's only a ballpark thing, it doesn't matter if you're exact as you'll correct it come April 15 anyway. – Loren Pechtel Aug 8 '13 at 21:36
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As long as you paid 100% of your last year's tax liability (overall tax liability, the total tax to pay on your 1040) or 90% of the total tax liability this year, or your underpayment is no more than $1000, you won't be penalized as long as you pay the difference by April 15th. That's per the IRS.

I don't know where the "10% of my income" came from, I'm not aware of any such rule.

  • So if i didn't pay 100% of last year's tax liability (it's not an excuse afaik with the IRS, but I didn't know), can I do so now? – Evan Carroll Aug 8 '13 at 7:02
  • Check the instructions for form 1040-ES – littleadv Aug 8 '13 at 7:23
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So there are a lot of people that get into trouble in your type of self employment situation. This is what I do, and I use google drive so there are no cost for tools. However, having an accounting system is better.

  1. Have a business bank account. When you want to take money out of the account, write a check or withdraw into your personal account. Business expenses can come out of this business account.
  2. In a spreadsheet:
  3. Keep track of your income.
  4. Keep track of your expenses (I am sure there are some very good books/web sites that outline applicable expenses).
  5. Go #3-#4, multiply by .25. That is the amount of taxes you need to set aside. DO NOT EVER SPEND THAT MONEY.
  6. If it is time for quarterly filings, send the amount in 5.

Getting in trouble with the IRS really sucks bad.

protected by Chris W. Rea Feb 13 '16 at 0:22

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