7

My wife is currently freelancing, and the IRS would want us to file and pay estimated taxes every quarter, which is a pain. I could take extra deductions out of my paycheck, but figuring out the additional amount to withhold is a bit of a pain to.

Preferably I'd stick roughly the amount of taxes due in a savings account each month and pay all taxes when we file, but read there could be a penalty if you owe money at time of filing.

So, should we bite the bullet and go with the quarterly filing, withhold extra from my paycheck or save the money and pay when we file (preferred)? We're filing married jointly.

  • Do you file married jointly? – Michael Pryor Aug 5 '10 at 16:12
  • @Michael: yup - will edit to reflect – Korneel Bouman Aug 5 '10 at 16:40
4

I would suggest you pay quarterly. Or, if you prefer, do the extra withholding. Don't wait until the end of the year.

My experience is that of having a day job with freelance work on the side. I've spent a few years just freelancing, and I paid quarterly as requested to avoid the penalties. Now that I have a good day job again, my freelancing is just a small part of my income, and so I end up with a net return and no longer have to pay quarterly.

You shouldn't wait until the end of the year to pay. This is assuming your wife is bringing in a decent income. The only scenario where you would want to wait is if her income is only a small amount (such as my wife's plans for an Etsy store).

To the IRS, it doesn't really make a difference whether you withhold extra or pay quarterly. Of those two choices, my preference is to pay quarterly - it's easy to set up calendar reminders on the quarterly payment dates, which are always the same. I did the same as bstpierre when estimating my payments: just take last year's tax (for the business) and divide by 4 (adjusting for any obvious situational differences). That's usually close enough.

Paying quarterly instead of via withholding means you get to hold on to your money (on average) for 6 weeks longer. Granted, that doesn't mean much with today's interest rates, but it's something. You may prefer the simpler accounting for withholding, though - you can "set and forget".

  • Can you skip a quarter and make it up in the next quarterly payment? – milesmeow Apr 20 '12 at 16:25
  • I would pay it as soon as possible. If in doubt, contact the IRS. – Stephen Cleary Apr 20 '12 at 16:45
3

I'm also self employed. Your circumstances may be different, but my accountant told me there was no reason to pay more than 100% of last years' taxes. (Even if this years' earnings are higher.) So I divide last year by 4 and make the quarterlies.

As an aside, I accidentally underpaid last year (mis-estimated), and the penalty was much smaller than I expected.

2

Your goal should be to withhold enough from your paycheck that you don't owe any taxes at the end of the year on your total married income. If you owe, that's where you'll run into trouble. However, there is some caveat about if you withhold more 110% of what you withheld last year or something similar, but I can't find it online.

  • 2
    Hmm, the IRS says: "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 would mean that if I make sure to have withheld at least 100% of my 2009 taxes, we'll be in the clear in terms of having to pay a penalty. I'm going to call my accountant... And probably up my withholdings... – Korneel Bouman Aug 5 '10 at 20:35

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