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.
You mentioned DC. So, is this a local tax rule and not federal? I haven’t been withholding anything, ever, but I read about it a lot. Not sure if I should be worried. My acct hasn’t said anything about it before.
@Darwin’s Money, I have to worry about both, the first scenario (which I passed) is federal. The second (failed) is state, so it varies, but other states could be similar.
This made my head spin. I’m going to HR Block.
@Kevin McKee, Welcome to my world.
Just throwing it out there, it may be easier to just increase your withholding at work. I always think it is better to get even a few thousand back then to go through the stress and headache you just had.
@Evan, True, and the sad thing is that I did withhold extra and increased as I made more money on the side, but didn’t account for all of it. Good a problem to have maybe? Better than not having to worry about at all, for sure.
These are the additional responsibilities of being self employed. Automate when you can. For example, I set up an automatic payment for LTC insurance quarterly. You could set up a payment to the IRS and just change the amount each time.
Nice! I didn’t know you were so close! I am just 2 hours down the road in central Virginia.
This is an interesting consideration for me to think about as well – since I am starting to make a little money from blogging. It kind of creeps up on you. I need to get better prepared.
I had a business that was left to me after my spouse passed away. A guy came in and ran the business and took care of payroll and quartely taxes. We sold the business and he did not pay the last quarter. No one has pay stubs and there is NO information anywhere for me to get those numbers. I know what their last checks were I just don’t know how much was taken out. How can I figure this out?
The good thing is that the IRS is nice. Even if you have to pay a 4% penalty on the taxes you owe, it’s not that big of a deal.
Just to clarify, I assume you haven’t incorporated? And since you haven’t, you still have to send quarterly taxes in and can’t just file at the end of the year?
@Financial Samurai, I haven’t incorporated yet, nor do I really want to. Until I have a good reason to that will save me in the long run, I will hold off.
4% isn’t terrible, but the thought of paying money for something I could have controlled sucks!