MANY OF MY CLIENTS are freelancers who are legally required to make estimated tax payments. I remind them that the IRS takes a dim view of freelancers, self-employed individuals and others who miss deadlines for making those quarterly payments. Miss just one, says the IRS, and it might exact a sizable, nondeductible penalty.
Who are in the IRS’s crosshairs? Individuals who receive income from sources not subject to withholding and whose tax liability exceeds $1,000, including any self-employment tax. Folks in the following categories are particularly at risk:
This year’s first deadline for estimated tax payments is April 17. (The 15th falls on a Sunday and the 16th is a legal holiday in Washington, DC. When the usual due dates fall on a Saturday, Sunday or state legal holiday, they’re extended until the next weekday.)
The other deadlines for the 2018 tax year are June 15, Sept. 17 (the 15th falls on a Saturday) and Jan. 15, 2019. The IRS allows individuals to skip January’s payment, provided they submit their 1040 forms and pay their tax in full by Feb. 1.
Suppose you moonlight as a writer and have a fulltime job elsewhere. You’re not excused from making estimated payments just because you’re a part-timer.
There is, however, an IRS-approved way to avoid making those estimated payments on your writing income: You could file a revised W-4 with your employer and increase the income tax withheld from your regular paycheck. This maneuver works when 2018’s withholding is enough to cover the taxes on your salary and on your writing.
Be mindful that the IRS imposes penalties for failing to pay sufficient tax during the year through withholding or estimated payments, as well as for failure to pay required installments on time. It matters not that your final estimated payments are sufficient to erase any balance due when you submit 2018’s 1040 form in early 2019.
Suppose you’re in danger of being penalized for making insufficient estimated payments throughout the year. Will the IRS forget about penalties for underpayments in the three previous quarters if you pay the shortfall through an increase in your last quarterly estimated payment? No, that won’t work.
What does work, however, is making up the shortfall through increased withholding from wages (or from sources such as Social Security benefits, pensions and money removed from tax-deferred retirement plans) toward the end of the year.
The IRS allocates withholding equally over each of the four payment periods. Consequently, boosting withholding can retroactively lessen or eliminate penalties when a similar increase in an estimated payment might not.
What if you underpay your federal taxes by more than $1,000—and you’re potentially facing penalties? You may be able to sidestep the penalty if 2018’s combined estimated and withheld taxes equal at least 90% of the actual taxes you owe for 2018—or, alternatively, if the taxes you paid over the course of year equal 100% of 2017’s total tax liability. Let’s say your tax liability is $12,000 for 2017 and your estimated payments are $12,000 for 2018. With those kinds of numbers, you’re home free, no matter how much you owe when you file for 2018.
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Check Him Out, The Last Word and Lost Items. This article is excerpted from Julian Block’s Year-Round Tax Savings, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.