As a consultant, I got used to paying quarterly taxes. Now that I'm a regular w2 salaried employee, I'm subject to normal withholding on each pay statement. I would like to keep making exact quarterly payments instead of having a (generally incorrect) amount held back each paycheck.

I haven't been able to find any information on the 1040-es that would make me think I'm ineligible to do so, but I suspect that it may be the case. I'd have to stop paycheck withholdings by updating my w4 to either have a high number of exemptions or mark myself as exempt from taxes, which I assume is where the rub lies.

So, as a regular salaryman, is it possible for me to pay taxes exclusively through quarterly payments in lieu of traditional withholdings?

  • It seems I missed the previously-asked question because I was searching for "estimated tax" instead of "quarterly taxes" – Hari Ganti Mar 1 '19 at 4:30

Employers are required to withhold income tax as well as Social Security and Medicare taxes from wages paid to their employees and send this money (together with the employer's share of Social Security and Medicare taxes on salaries paid to their employees) in timely fashion to the government. Here, timely rarely means by the end if the quarter; for large employers, it can semi-weekly, while for smaller employers it might be the end of the month, or 30 days etc. Self-employed persons with no employees (other than immediate family) can send their estimated tax payments on a quarterly basis, but not most anybody else.

So, can you arrange to have no withholding of taxes from your paychecks, and make payments quarterly as you used to? The answer is No, because even if you claim a gazillion allowances on Form W-4 to drive the income tax withholding to zero, you cannot get rid of the Social Security and Medicare tax component. Also, employers are required to report large claims of allowances on W-4 forms to the IRS, and not accept such claims at face value. So you are SOL on this matter.

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    It may be worth mentioning that when you sign the w4 you are attesting "Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete," so if you falsely claim too many dependents or exemption, that's a felony and you could go to jail for five years for it. – Kevin Feb 27 '18 at 3:54
  • The above answer is NO, you can not pay taxes exclusively by quarterly in lieu of regular withholding. However, you can change your W4 throughout the year to include additional amounts if you think that your standard withholding is insufficient. As far as I know, you can do this as often as you like. – BobE Feb 27 '18 at 4:00
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    @Kevin It is perfectly legitimate to claim extra allowances (more than the number of dependents) so that the tax withholding more closely approximates the actual tax due, but this provision has been so often abused in the past, especially by those who espouse beliefs such as the income tax is unconstitutional because the constitutional amendment allowing for income tax to be imposed was never properly ratified, that employers are required to report suspected abuses and indeed to be more suspicious than their natural inclination might be. – Dilip Sarwate Feb 27 '18 at 4:12
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    I've accepted this answer because it has provided the context that I'm looking for. The answer does indeed seem to be what I expected - anyone can file quarterly taxes as needed. The problem comes from the requirement of my employer to tax me appropriately, thus leaving me with nothing to file as a quarterly payment unless complications arise. I just converted a traditional IRA into a Roth IRA and elected to have $0 withheld, so I probably would be obligated to file a quarterly return in this case to make up for the additional 'income'. – Brian R Feb 27 '18 at 17:11
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    Since 2005 employer is no longer required to proactively send 'questionable' W4's to IRS; they are required to send or provide W4's on request, and must disregard an employee's W4 if it is not validly signed (with the official jurat) or if the employee "clearly indicates it is false" -- or if/after the IRS issues a 'lock-in letter' that specifies maximum allowances (and status) for an employee. See irs.gov/irb/2007-35_IRB#TD-9337 referenced by pub 15 – dave_thompson_085 Feb 28 '19 at 4:41

You can't do that.

You can't directly control the amount that is withheld from your paycheck. You can only indirectly change it, by using form W-4. When filling out form W-4, you aren't supposed to write an excessive number of allowances. The allowances have to be justified by your tax situation.

Specifically, IRS pub 505 states "You can claim only the number of allowances to which you are entitled." and "You may have to pay a penalty of $500 if [...] You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4."

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    I should have just looked at the W-4, because, interestingly enough, I can't just enter a withholding amount (like I can with my DE-4) – Hari Ganti Feb 27 '19 at 23:14

On your W-4 form, you don't pick an amount to withhold; you pick a number of allowances. You arrive at the number of allowances by filling out worksheets associated with the W-4.

You must do this based on life facts you believe to be true at the time you fill it out.

If your situation changes, you can/should/must change the number of allowances.

Further, if you have an unforeseen turn of fortune that puts you behind in your withholding, then you must make additional payments via some method. 1040-ES is perfectly acceptable.

There is a way to specify flat dollars per check to withhold, but that is intended for when 0 allowances is not enough withholding; say you had a 401k loan go bust and must pay income tax on all that. I suppose you could specify 99 allowances and a fixed dollar amount to withhold, but that could blow up on you if the IRS catches you.

Honestly, I do not see the IRS caring as long as your withholding is reasonably close to your final tax bill. and you paid it evenly through the year, or at least, in proportion to when the income did occur. So if you get a windfall in December, just pre-pay the expected tax ASAP.

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  • What you call "exemptions" the IRS refers to as "allowances". – stannius Feb 28 '19 at 1:30
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    It's also perfectly possible (I've done it) to have tax withheld on W2 income, and still need to pay estimated tax on other income. – jamesqf Feb 28 '19 at 2:12
  • You aren't supposed to specify 99 allowances and a fixed dollar amount, convenient though that may be. You could probably get away with it for at least a while, since employers don't send W-4 forms to the IRS any more (they used to). – stannius Feb 28 '19 at 16:21
  • Anecdotally, I... have a friend... who got away with it for five years or so. – stannius Feb 28 '19 at 18:21

While stannius' answer definitely alarms me, on the top of the same document (pub 505) the IRS seems much more relaxed.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go.

Withholding. If you are an employee, your employer probably withholds income tax from your pay. In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the IRS in your name.

Estimated tax. If you don’t pay your tax through withholding, or don’t pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.

So it seems not very cut and dry. FWIW I've done this method (claiming approx. income/4150 allowances on my W4, intelligently investing the float, then paying estimated payments ideally with a new credit card) for my state (Oregon) and Federal for the last two quarters and will definitely report back if I'm audited!

EDIT: I have had a phone conversation with an Oregon tax auditor already, but this conversation reminds me that I didn't have a statement from a Federal auditor yet. Will work on that.

EDIT2: The IRS was recently required to not give public "tax law" support anymore and instead defer it to private individuals/companies. So, hopefully I'll get some leniency from the IRS if they call. After talking with two accountants that deal with worse things (non-payment, etc), they both thought that I wouldn't have any problems with this. We shall see!

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    26 USC section 3402 (f)(2)(A): “the employee shall furnish the employer with a signed withholding allowance certificate relating to the withholding allowance claimed by the employee, which shall in no event exceed the amount to which the employee is entitled.” Similar wording appears in paragraphs (B) and (C). – prl Feb 28 '19 at 7:52
  • " income/4150 " so that you have approximately zero withheld? Are you doing this at the federal level or just at the state level? – stannius Feb 28 '19 at 16:19
  • @prl I agree, the case doesn't look great. But naively my thought is it's not that clear either. – Nolan Hergert Feb 28 '19 at 18:03
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    @Nolan, it seems pretty clear to me that it is illegal. Whether they will catch you, or what penalty they may impose is unclear. The statement above your signature on W-4 uses the words "Under penalties of perjury, I declare ...". So you might look up the federal perjury penalties. I think you might not like what you find. – prl Feb 28 '19 at 19:52
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    @stannius+ IRS can't notice during the year; they get money from the employer quickly (as Dilip said) but that's a bulk payment for all employees, it is credited to individuals only when employer files W2's after year-end. Same for (AFAIK all) states. I concur this is prohibited, but they aren't likely to pursue you; they already have more people who don't pay at all, or underreport by many thousands of $, or claim to be exempt aliens from Uranus, than they can afford to chase. You're cheating by about 0.5%, or $100 on a liability of $20k. – dave_thompson_085 Mar 5 '19 at 22:56

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