On Wednesday, I did a quick estimate of my taxes to see how much more I would owe for federal and state taxes and I realize that I may owe so much that I would be charged a penalty for underpayment! I guess I didn’t realize how much I made blogging, so even though I withheld an extra few hundred dollars on each paycheck since August, it didn’t nearly cover the taxes I would have to pay for blogging.
For federal taxes, there’s no penalty if you owe less than $1,000 in taxes. I was over that by a decent margin. OK, so how much would I actually owe, what’s the interest rate? 4%. Crap, that’s about triple what I earn in interest, what was I thinking, why didn’t I plan earlier??
In a panic (because I hate paying for things I could have controlled!), I looked up the federal tax rule for who has to pay estimated taxes:
You must pay estimated tax for 2010 if both of the following apply.
- You expect to owe at least $1,000 in tax for 2010 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2010 tax return, or
- 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months.
Alright, I already said I fit criteria 1. Mark that as a yes. On to criteria 2.
While I had a lot withheld, it’s not 90% of my liability. Shoot, yes again. Down to my final chance.
Since this is my first year making a significant amount of money blogging, I owe much more in taxes this year than last year. That means I don’t fit that last option and I don’t have to pay estimated federal taxes! Crisis averted, right?
Not quite, I still have to worry about state taxes. In DC, the rule is that if you’re going to owe over $100 in taxes, you have to make quarterly estimated tax payments unless those payments would are:
- 90 percent of the tax due for the taxable year; or
- 100 percent of last year’s tax obligation (if the taxpayer was a 12-month DC resident during last year).
OK, looks pretty similar, right?
I don’t fit the first one, but I fit the second one, right?
Well…not exactly. I didn’t move to DC until July of 2009, so technically I wasn’t ‘a 12-month DC resident during last year.
O gosh, according to the annualized 10% underpayment rate, I was going to owe about $75 if I paid the bill immediately, which isn’t the end of the world, but definitely should have been avoided.
I want to pay these estimated taxes as soon as possible, even if they’re late, because the sooner I pay them, the sooner I won’t have to pay interest on it.
After looking up the rules about how to pay, I realized that the payment wasn’t due until January 15th, 2011. Which means I still had 3 days to make the deadline! I found the proper form online, filled it out, and I’m mailing it off today and will hopefully avoid any penalty.
Obviously, I’m going to start making some major changes. I signed up for the online payment system for the federal estimated quarterly tax payments as well as the online DC payment system. In 2011, I’m going to be very careful, and this way I’ll save myself some stress come January 2012.