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Do I need to submit quarterly tax payments or just increase withholding?

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  • Do I need to submit quarterly tax payments or just increase withholding?

    My husband and I have three W-2 jobs between us. In order to be in tax safe harbor for 2021, we will need to be pay 110% of our 2020 tax liability. Do we have to send quarterly estimated payments (again all W-2 jobs) or just make sure the withholding from paychecks will meet this level? Thank you in advance.

  • #2
    Easier to increase W2 withholding at one of the jobs rather than make estimated tax payments to meet safe harbor.

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    • #3
      If all your jobs are employed then you should be withholding the appropriate amount. You will likely have to withhold extra because your jobs aren’t aware of the other income so you’ll be under withholding. It won’t take much math to get 110% of last year’s taxes but it’ll take some calculation so you won’t be surprised by what you owe come tax time. 110% of last year’s taxes isn’t the only safe harbor.

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      • #4
        Use IRS W4 calculator.

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        • #5
          Originally posted by Betterattheview18 View Post
          My husband and I have three W-2 jobs between us. In order to be in tax safe harbor for 2021, we will need to be pay 110% of our 2020 tax liability. Do we have to send quarterly estimated payments (again all W-2 jobs) or just make sure the withholding from paychecks will meet this level? Thank you in advance.
          If the W-2 income is predictable, it will be better to adjust withholding and pay it regularly. Based on all I read, IRS likes that. Then if you are below 110% by end of Dec, you can make one Quarterly estimated payment for last quarter and get the total tax paid prev 110. We pay about 90% of previous years tax with payroll till December and then make it exact 110% using one quarterly estimated payment before Jan 15. So we don't end up overpaying taxes by a lot (or underpay it and get a penalty).

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          • #6
            There are three federal income tax underpayment safe harbors:
            1. < $1000 underpayment
            2. !00%/110%* of prior year tax liability
            3. 90% of current year tax liability
            Unless last year's tax liability was < 81.8% of current year's tax liability, safe harbor 3 above will be lower.

            *if prior year's AGI > $150K.

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            • #7
              Originally posted by NowOpenWide View Post

              If the W-2 income is predictable, it will be better to adjust withholding and pay it regularly. Based on all I read, IRS likes that. Then if you are below 110% by end of Dec, you can make one Quarterly estimated payment for last quarter and get the total tax paid prev 110. We pay about 90% of previous years tax with payroll till December and then make it exact 110% using one quarterly estimated payment before Jan 15. So we don't end up overpaying taxes by a lot (or underpay it and get a penalty).
              The only problem with this method is that the Q4 estimated payment is timed last and you are more likely to incur a penalty for waiting that long if you end up short. The best way to use the “withholding only” method is to carefully monitor your progress to ensure you are on track for 110% and have enough payroll in December to withhold a chunk, if necessary. Estimated payments are tracked to the exact date they are sent in. Withholding, even in December, is treated as if it is evenly spread throughout the year.

              Once again, I’ll remind everybody that we delete federal penalties calculating for < $100 for clients and they don’t get a bill from the IRS. Of course, there is no guarantee that won’t change at any time but it’s worth a try. States tend to be less forgiving but we typically have no problem with them, either.
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                Originally posted by jfoxcpacfp View Post

                The only problem with this method is that the Q4 estimated payment is timed last and you are more likely to incur a penalty for waiting that long if you end up short. The best way to use the “withholding only” method is to carefully monitor your progress to ensure you are on track for 110% and have enough payroll in December to withhold a chunk, if necessary. Estimated payments are tracked to the exact date they are sent in. Withholding, even in December, is treated as if it is evenly spread throughout the year.

                Once again, I’ll remind everybody that we delete federal penalties calculating for < $100 for clients and they don’t get a bill from the IRS. Of course, there is no guarantee that won’t change at any time but it’s worth a try. States tend to be less forgiving but we typically have no problem with them, either.
                Humm, thanks for the info! Not sure why my CPA did not mention this. Our Q4 estimated tax is usually less than 4-5K (Not a huge amount, percentage of tax wise) and we pay throughout the year with Payroll deductions as well. The last payment is just to make it over 110%. Though it is possible that the total payroll deductions go above 90% of that years tax liability.

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                • #9
                  Originally posted by NowOpenWide View Post

                  Humm, thanks for the info! Not sure why my CPA did not mention this. Our Q4 estimated tax is usually less than 4-5K (Not a huge amount, percentage of tax wise) and we pay throughout the year with Payroll deductions as well. The last payment is just to make it over 110%. Though it is possible that the total payroll deductions go above 90% of that years tax liability.
                  So, if not a huge amount, I wouldn’t expect you to owe that much in penalties, maybe that’s your accountant’s thought process, just to keep it simple. Everyone has their own way of doing things and every client has a unique situation. In our population, very few clients have predictable W2s unless they are in the 1st 2-3 years out of training and on straight salary, no bonuses, no moonlighting, etc. As a result, we like to make adjustments through December withholding, although not always possible.
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    We use withholding to target 90% of liability. I keep track of things like buyouts that might trigger a taxable gains as well as deductions. Monitoring where we are through the year, I adjust the withholding accordingly.

                    That results in no refund, taxes due, but no penalties.

                    Not particularly complicated and it is now easy to change withholding online. Until recently, ha to do a paper form faxed to HR each time to make a change.

                    At the end of the year, if there were large unexpected receipts, I adjust the amount withheld from my bonus. Since it is withheld, it is considered timely paid, even if the money came in earlier in the year. Much better than using estimated tax payments.

                    Only once have I screwed up and gotten a refund.

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                    • #11
                      Thank you all for input!

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