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TL;DR - Form 1040es lines 14a and 14b are very different, causing me to be wary of my end result for required quarterly estimated tax payments.

I've been working through my 1040es for the first time as a self-employed individual, and have followed the directions to a tee, but my end result seems like it simply cannot be correct.

My question mostly concerns form 1040es line 14b. Last year I was a student and subsequently worked full-time for a few months before making the switch to self employment at the end of the year - so after applying ed credits and whatnot my tax requirement wasn't too high. However, my numbers this year are going to be a bit higher as I'm making a higher rate and working for the full length of the year (as opposed to hemorrhaging money as a student for half the year) - I'm calculating this from last year's 1040a as per the instructions.

This caused my result on line 14b to be considerably lower than my result on line 14a, and since the rest of the form is based off of the lower number of the two, my quarterly payment requirements ended up being a lot lower than I was expecting.

Again, I've followed the directions to the best of my ability (I'm still new at this, but I'm a DIY kinda person - maybe not the best idea in this situation), so I guess my question is - does it sound like I did this right, or is there perhaps something I'm not taking into account? I'm just a little uneasy about messing this up my first time...

  • I also being vague on purpose, so I apologize if my question is unclear. If there is more info I can provide, I'll do so gladly – Jordan Foreman Apr 14 '14 at 14:47
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    As a self-employed person, you report both the employee's share and the employer's share of Social Security and Medicare taxes when you file your 1040, and thus the total tax due for the year will be higher than you would get by simply looking up the tax due on your estimated income from the tax tables or applying the tax rate schedule. Have you taken this into account? – Dilip Sarwate Apr 14 '14 at 15:04
  • @DilipSarwate I believe that is irrelevant to my question, as those values are calculated into Total 2014 Estimated Taxes, which - since its much higher than my Required annual payment based on prior year's tax - gets left out of the end result, correct? – Jordan Foreman Apr 14 '14 at 15:31
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1040ES uses the smaller number because that's what triggers the penalties. (That is, you are penalized if what you prepay is less than your total 2013 liability and less than 90% of your 2014 liability.) However, estimated taxes are just estimates. If you pay too little, you could face a penalty, but there's no penalty for paying too much -- you'll just get a refund as usual.

It seems that your concern stems from the fact that this is the first year you're in this tax situation and so you're unsure if your estimates are accurate. In your comment to Pete Belford's answer, you also indicated you aren't worried about being unable to pay, but only about accidentally underpaying.

In this case, you could just err on the side of caution and pay more than 1040ES says you owe. (You don't actually file the 1040ES, the calculations are just for your own use.) For instance, you could prepay based on the higher of your two estimates, if you can afford it; or, if you can't afford that much, hedge the estimate payments up a bit to an amount you can afford that is closer to the higher estimate. At the end of the year if you paid too much you can get a refund as usual. After this year, you will presumably have a better sense of your income and your tax liability, and can make more accurate estimates for next year.

  • I think this is the answer I'm looking for. It sounds like as long as I'm confident in my calculations (the worksheet isn't really that difficult to follow) I shouldn't have a problem. I'll take your advice and pay a bit extra to bridge the gap just to be safe. It sounds like I may be fretting a little more than need be. Thanks for the advice! – Jordan Foreman Apr 14 '14 at 17:55
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I do something pretty simple when figuring 1099 income. I keep track of my income and deductible expenses on a spreadsheet. Then I do total income - total expenses * .25.

I keep that amount in a savings account ready to pay taxes.

Given that your estimates for the quarterly payments are low then expected, that amount should be more then enough to fully fund those payments.

If you are correct, and they are low, then really what does it matter? You will have the money, in the bank, to pay what you actually owe to the IRS.

  • That's a great strategy, however, my fear isn't being unable to pay but rather I'm afraid of accidentally underpaying. Are you saying that even if I accidentally underpay quarterly, I'll just have to pay the difference at the end of the year when I do my yearly (and shouldn't be too worried)? – Jordan Foreman Apr 14 '14 at 15:37

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