Advice for avoiding tax penalty for unequal estimated tax payments

[Ksteph]

Hello. I have a question regarding estimated taxes that I’m hoping someone can help me out with. I just completed my fellowship training and had moonlighted from January to July this year. Due to underestimation of moonlighting earnings (I got more shifts later on in the period), I ended up paying lower estimated taxes for the 1st quarter than I did for the 2nd quarter. Now that I’ve completed moonlighting for the year, I’ve realized that I made even more earnings than initially estimated. I am concerned that paying higher estimated taxes for the 2^nd quarter compared to the 1st already exposes me to tax penalties, and that paying even higher estimated taxes for the 3rd and 4^th quarters would incur even more penalties. I am pretty much confident that I’ll end up paying more taxes in total this year compared to last year due to anticipated attending income I expect to generate during the later part of this year. How should I proceed?

 

1. Pay the same amount in the 3^rd and 4^th quarters as I did for the second, and then pay the balance during tax filing season? Would there be a way to avoid the penalty for making a smaller payment in the 1^st quarter? Would the fact that I’ll have paid more total taxes this year compared to last year automatically prevent the penalty, or would I have to fill out the form explaining that I had unequal self employment income for the different quarters (I forget what the form is called, and I hear it’s a pain to fill out, lol). Is there a way to avoid filling out this form?

 

2. Pay the even higher estimated taxes for the 3^rd and 4^th quarters? Would I be able to avoid the penalty doing this?

 

I appreciate any insight you guys might have on this. Many thanks in advance.

[jfoxcpacfp]

You're worrying unnecessarily. You won't owe a penalty because your prior year tax liability will be so much less than your 2017 tax liability. If you withhold an amount equal to the prior year's liability - which you should do since you'll withhold so much more as an attending - then you'll be fine. The extra estimates will help, too, but just to lower your balance due next April 15.

Now, let's assume you were an attending for the full years of 2016 and 2017 and you were moonlighting in 2017 and calculated you had underpaid your estimates. There is still a solution: the IRS treats taxes withheld as being spread equally throughout the year. By adjusting your W4 to take into account the extra taxes you'll owe from moonlighting, you won't owe a penalty, even if you "super-withhold" only in the month of December. Some people prefer doing this to making estimated payments.

[Ksteph]

Thank you for your answer. I really appreciate it!

[DMAL]

 

jfoxcpacfp wrote:

You’re worrying unnecessarily. You won’t owe a penalty because your prior year tax liability will be so much less than your 2017 tax liability. If you withhold an amount equal to the prior year’s liability – which you should do since you’ll withhold so much more as an attending – then you’ll be fine. The extra estimates will help, too, but just to lower your balance due next April 15.

Now, let’s assume you were an attending for the full years of 2016 and 2017 and you were moonlighting in 2017 and calculated you had underpaid your estimates. There is still a solution: the IRS treats taxes withheld as being spread equally throughout the year. By adjusting your W4 to take into account the extra taxes you’ll owe from moonlighting, you won’t owe a penalty, even if you “super-withhold” only in the month of December. Some people prefer doing this to making estimated payments.

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Still trying understand this. I sounds simple, but having huge mental block on this for some reason.

So basically, if your total tax liability from last year was ~12,000$ (based on a combined income W2 +1099= ~ 55,000$) And this year you have a huge increase in 1099 income (say approaching 260k), you can avoid penalty by making estimate payments that will equal a total of 12000$ for year? Of course with the expectation that you'll owe a huge tax bill next year?

 

[jfoxcpacfp]

DMAL wrote:

So basically, if your total tax liability from last year was ~12,000$ (based on a combined income W2 +1099= ~ 55,000$) And this year you have a huge increase in 1099 income (say approaching 260k), you can avoid penalty by making estimate payments that will equal a total of 12000$ for year? Of course with the expectation that you’ll owe a huge tax bill next year?

Click to expand...

Yes, that is correct. Note that if your 2016 AGI was $150k+, then you'll need to pay in 110% of the tax on your 2016 return (or $13,200) instead of $12k. This can be in the form of estimated payments of withholding from your paycheck.