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I earn wages and my employer withholds taxes from my paycheck in the usual way. My wife is newly self-employed, and we are calculating her estimated taxes for her self-employment income for this year. We filed jointly for tax year 2016, and plan to file jointly this year (when we do our 2017 taxes in early 2018).

To calculate her estimated taxes (both Federal and State), we are using her estimated Adjusted Gross Income for this year, since my portion of our total AGI already has tax withheld for each bi-weekly paycheck.

However, at multiple points in calculating estimated taxes, we have to select a filing status -- for calculating standard deductions, and for choosing appropriate tax rate schedules, for example. Should I choose the "married filing jointly" status, because, when we file, we'll be filing jointly?

Thanks!

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However, at multiple points in calculating estimated taxes, we have to select a filing status -- for calculating standard deductions, and for choosing appropriate tax rate schedules, for example. Should I choose the "married filing jointly" status, because, when we file, we'll be filing jointly?

It doesn't actually matter. By selecting (married filing) jointly, you are asking the IRS (Internal Revenue Service) to point you at the formulas that represent their best guess as to how much you will owe. The issue is that if they guess wrong, you are still responsible. So there is no single "right" answer.

When might they guess wrong? They aren't so good with variable incomes, particularly if they are close to the deduction. If your wife has a steady income stream, then that's easy. They'll almost certainly give you the right estimate with married filing jointly. But on a variable income stream, they may overwithhold sometimes and underwithhold other times. You can't be sure that they'll get it right overall.

A more reliable (but more difficult) method

In the first quarter, take your wife's actual first quarter income and yours and estimate the later three quarters. Pay one quarter of the annual tax on that, subtracting what your employer withholds. In the second quarter, the two of you will only have five months of actual income. So use your actual five months of income and add an estimate of you next seven months of income--then pay half of the tax on that--minus your employer withholding and what you paid in the first quarter. In the third quarter, you only have eight months of income. So add an estimate for the remaining four months and pay three quarters of the tax on the sum minus what you and your employer already paid.

Finally you have all the year's paychecks. Calculate and pay the whole tax for the year minus whatever was already paid. Under no circumstances should you pay less than the actual tax owed minus $1000. If you have a lot of investment income and they haven't been withholding taxes, add enough extra for that. This is the payment that really matters. Even if you underpaid in one or more of the first three quarters, you can fix it in the fourth quarter. After the payment deadline, there is no fix for underpaying a fourth quarter except paying the fine/interest.

If your estimate for your combined tax is low by more than $1000, you may be subject to IRS penalties. You may find it easier to just overpay such that you get a refund. That's fine. You lose a little interest but save in peace of mind. Don't forget that you own Social Security and Medicare.

And I just want to point out one thing again. If the IRS is wrong and tells you to withhold the wrong amount of money, you are still responsible. They can fine you for following their advice. So be careful. Especially on that fourth estimated payment. Make sure that you pay taxes on everything. If necessary, overpay and effectively loan them money for a month until you have the paperwork to file your real return. Interest rates are not high enough that it's worth getting fined to minimize your payment. Overpayment won't change your eventual net payment, but underpayment can get you fined.

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    It's worth noting that so long as you pay 100% of your total tax liability from the prior year you won't get fined. Your answer is not wrong but there are ways to make sure you don't get hit with underpayment penalties. – D Stanley Apr 7 '17 at 15:13
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    Agree. I worked out the estimated taxes. When I add to that my projected withholdings for this year, and my wife's withholdings (from the final month of wages from previous job), the total figure is more than 110% of last year's Federal taxes, which means we shouldn't be penalized. For the state taxes, it's a bit shy of 110%, so we're just going to pay 110% (well, 25% of that, for the first estimated payment). And yes, we're aware that you have to pay 100% of your FICA/Medicare taxes when self-employed (and that you get to deduct 50% of that from your income). – David Apr 7 '17 at 18:24

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