Quarterly taxes with W2 and K1 income

[Jcdoc107]

I have not been able to find an answer to this question. Posted over at bogleheads without much luck.

I have both W2 and K1 income. The majority is K1 income. Is it possible to not withhold anything from my W2 and pay quarterly taxes on both W2 and K1 income or am I required to withhold from my W2 and pay quarterly on my K1 income?

[spiritrider]

W-2 withholding must be at least as much as the legitimate withholding required based on your circumstances. Once that has been accomplished you can reduce your withholding allowances as low as zero and even withhold a specific additional amount per pay period.

The quarterly estimated taxes must be the minimum necessary in conjunction with W-2 withholding to meet one of the safe news.

So the bottom line. You can not withhold $0 unless you will not have any taxable income. You can skip quarterly estimated tax payments if you will meet your tax obligations with just withholding.

[jfoxcpacfp]

Jcdoc107 wrote:

I have not been able to find an answer to this question. Posted over at bogleheads without much luck.

I have both W2 and K1 income. The majority is K1 income. Is it possible to not withhold anything from my W2 and pay quarterly taxes on both W2 and K1 income or am I required to withhold from my W2 and pay quarterly on my K1 income?

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As @spiritrider explained, you are required to withhold taxes from your employee earnings. To allow employees to bypass this would circumvent the original purpose of the law, which was for the government to receive income throughout the year rather than all with the filing of your income tax return. Of course, your case is different, as you are also making quarterly estimates, but the IRS cannot make up special rules for every outlier.

Consider this, however - taxes paid via withholding are treated as spread equally throughout the year whereas estimates are counted, for tax and penalty purposes, on the date made. In most cases, it is better to increase withholdings than to pay via estimate, even if you withhold very little most of the year and withhold all of your net pay in the last couple of months. Is there a particular reason you prefer estimated payments?

[Jcdoc107]

jfoxcpacfp wrote:

Jcdoc107 wrote:

I have not been able to find an answer to this question. Posted over at bogleheads without much luck.

I have both W2 and K1 income. The majority is K1 income. Is it possible to not withhold anything from my W2 and pay quarterly taxes on both W2 and K1 income or am I required to withhold from my W2 and pay quarterly on my K1 income?

Click to expand…

As @spiritrider explained, you are required to withhold taxes from your employee earnings. To allow employees to bypass this would circumvent the original purpose of the law, which was for the government to receive income throughout the year rather than all with the filing of your income tax return. Of course, your case is different, as you are also making quarterly estimates, but the IRS cannot make up special rules for every outlier.

Consider this, however – taxes paid via withholding are treated as spread equally throughout the year whereas estimates are counted, for tax and penalty purposes, on the date made. In most cases, it is better to increase withholdings than to pay via estimate, even if you withhold very little most of the year and withhold all of your net pay in the last couple of months. Is there a particular reason you prefer estimated payments?

Click to expand...

Most of my income comes from K1. Even if I withhold all of my W2 I would still have to make quarterly estimates and I would not have anything left to fund my 401K. My thought was since I would still have to make quarterly estimates why not just make quarterly estimates on all my income and earn a little extra by holding it in a high interest (1%) savings. I was told by our CFO this was okay but I could not verify anywhere. Sounds like that is not the case and I will have to withhold.

[jfoxcpacfp]

Jcdoc107 wrote:

jfoxcpacfp wrote:

Jcdoc107 wrote:

I have not been able to find an answer to this question. Posted over at bogleheads without much luck.

I have both W2 and K1 income. The majority is K1 income. Is it possible to not withhold anything from my W2 and pay quarterly taxes on both W2 and K1 income or am I required to withhold from my W2 and pay quarterly on my K1 income?

Click to expand…

As @spiritrider explained, you are required to withhold taxes from your employee earnings. To allow employees to bypass this would circumvent the original purpose of the law, which was for the government to receive income throughout the year rather than all with the filing of your income tax return. Of course, your case is different, as you are also making quarterly estimates, but the IRS cannot make up special rules for every outlier.

Consider this, however – taxes paid via withholding are treated as spread equally throughout the year whereas estimates are counted, for tax and penalty purposes, on the date made. In most cases, it is better to increase withholdings than to pay via estimate, even if you withhold very little most of the year and withhold all of your net pay in the last couple of months. Is there a particular reason you prefer estimated payments?

Click to expand…

Most of my income comes from K1. Even if I withhold all of my W2 I would still have to make quarterly estimates and I would not have anything left to fund my 401K. My thought was since I would still have to make quarterly estimates why not just make quarterly estimates on all my income and earn a little extra by holding it in a high interest (1%) savings. I was told by our CFO this was okay but I could not verify anywhere. Sounds like that is not the case and I will have to withhold.

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If your CFO is willing to do this, I say go for it! I've never heard of a notice from the IRS for non-withholding in a situation like this and I feel fairly certain there will be no problems. I had initially imagined you asking HR to do you a favor and your request being refused.

[spiritrider]

I am going to have to vehemently disagree.

Here is W-4 Line 7:

I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.
• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here ...............

Which you then sign:

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.

These circumstances most definitely do not qualify for an exemption to withholding. Not getting caught is not a legitimate defense of doing the right thing.

The fact that your CFO is on board with this, makes me question their fitness for office.

 

[Jcdoc107]

spiritrider wrote:

I am going to have to vehemently disagree.

Here is W-4 Line 7:

I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.
• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here ……………

Which you then sign:

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.

These circumstances most definitely do not qualify for an exemption to withholding. Not getting caught is not a legitimate defense of doing the right thing.

The fact that your CFO is on board with this, makes me question their fitness for office.

 

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Not sure if it makes any difference but I have never filled out a W4. I am just asked how much I want withheld each paycheck. I am a partner in an S-corp. Again, not sure if that makes any difference.

[jfoxcpacfp]

You make a good point. At the same time, this is an unusual situation that the above requirement is not intended to address. "Getting caught" would result in providing the appropriate explanation. I would have no problem doing this for myself under the same scenario. No harm, no foul - taxes are being paid, on time, just via alternate means not contemplated on the W-4. There is more risk in doing a back-door Roth, imho (and that is quite a low risk), at least as of today.

Another solution, Jcdoc107, is to claim enough exemptions to automatically exempt you from withholding. Given that your W2 income is low relative to your K1 income, you should be able to have exemption from withholding by default using this method.

[jfoxcpacfp]

Jcdoc107 wrote:

spiritrider wrote:

I am going to have to vehemently disagree.

Here is W-4 Line 7:

I claim exemption from withholding for 2017, and I certify that I meet both of the following conditions for exemption.
• Last year I had a right to a refund of all federal income tax withheld because I had no tax liability, and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
If you meet both conditions, write “Exempt” here ……………

Which you then sign:

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.

These circumstances most definitely do not qualify for an exemption to withholding. Not getting caught is not a legitimate defense of doing the right thing.

The fact that your CFO is on board with this, makes me question their fitness for office.

 

Click to expand…

Not sure if it makes any difference but I have never filled out a W4. I am just asked how much I want withheld each paycheck. I am a partner in an S-corp. Again, not sure if that makes any difference.

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lol, I'm a partner in a CPA S-corp and have never filled one out on myself, either, now that you mention it.

[spiritrider]

jfoxcpacfp wrote:

Jcdoc107 wrote:

Not sure if it makes any difference but I have never filled out a W4. I am just asked how much I want withheld each paycheck. I am a partner in an S-corp. Again, not sure if that makes any difference.

Click to expand…

lol, I’m a partner in a CPA S-corp and have never filled one out on myself, either, now that you mention it.

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The fact that particular S-Corps don't follow the rules doesn't make it right. It is still non-compliance. An S-Corporation is still an employer with employees and still subject to all IRS rules and regulations.

From Publication 15 (2017), (Circular E), Employer's Tax Guide, page 20.

Completing Form W4. The amount of any federal income tax withholding must be based on marital status and withholding allowances. Your employees may not base their withholding amounts on a fixed dollar amount or percentage. However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4.

and

Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. If a new employee doesn't give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances.

jcdoc107, your S-Corp is most definitely not in compliance allowing you to specify an amount to be withheld each paycheck.

jcdoc107 and Johanna, the only proper withholding by your S-Corp without a completed W-4 on file is single/no allowances.