Estimated Taxes Unexpected SE Income in FIRE

[Peter Gibbons]

I have a little tax situation and would appreciate any advice.  I took a severance from my corporate employer in 2016 and entered FIRE.  My wife works part time and earns a very small salary on the order of $10k/yr with minimal taxes withheld.  I started doing some freelance consulting work, but was not expecting to earn too much and did not file any quarterly estimated tax payments for 2017 yet.  However, over the last few months business has picked up and I am now expecting to owe some taxes.  I now estimate my self employment income will be as follows in 2017:

Q1:  - $500
Q2:  $5,000
Q3:  $20,000
Q4:  $40,000

I have not filed any quarterly estimated taxes yet this year.  As the 3rd quarter came to an end, I started doing some research and now I am worried that I will get hit with penalties even though my business income was mostly at the end of the calendar year.  I missed the 9/15 deadline for a quarterly payment (I was unpleasantly surprised that this was due before the end of the calendar year 3rd quarter).   What do I need to do to now avoid/ minimize the penalties ?

Thanks !

[MDM]

What do I need to do to now avoid/ minimize the penalties ?

Some combination of
- Have your wife withhold ~the whole paycheck for the rest of the year
- Make your estimated tax payment ASAP
should work.

See 2016 Form 2210 - f2210.pdf if you want to do some planning.

See also Who Must Pay Estimated Tax to see the "safe harbors" you can use.  E.g., owe less than $1000 when filing, etc.

[Zaga]

What was your total tax liability in 2016?  You need to know that to see if you're going to avoid penalties for 2017.

The rule is you have to withhold (and/or pay in quarterlies) 100% of the previous tax year's total liability, OR 90% of this tax year's liability.

Since you state that in 2016 you didn't have business income, just make sure your wife's withholding is enough to equal your 2016 liability.  If it's not, send in a "quarterly" payment before the final deadline.  Of course, make sure you have enough set aside to pay the rest of your taxes when you file, and start paying your quarterlies for 2018.

[Peter Gibbons]

Thanks for the replies.  I just worked through the estimated tax worksheet and I expect to owe about $15k in taxes for 2017.  I just logged onto the irs direct pay site and made an estimated tax payment for $7k (I should have paid this prior to September 15th, but just figured that out today).  I'll plan to make another estimated tax payment for $8k prior to January 15th.  Not sure if I will end up getting hit with a penalty or not yet.

My 2016 income and taxes were very high because I worked at Megacorp for 6 months and then also took a substantial severance which enabled me to start FIRE.

[Zaga]

Are you including your Social Security and Medicare taxes owed in your calculation?  Remember being self employed you'll have to pay both your half and the "company" half of those taxes.

[Peter Gibbons]

Yes I included the SS & Medicare in the estimated tax worksheet.  That was about $9500.  And my estimated federal income tax was about $5500.

[bacchi]

Open a solo 401k before the end of the year. Also, remember that any health care premiums are deductible*. So is that new laptop that you bought for work.

The penalty is negligible. Don't stress about it.



* If you don't have coverage from your wife's work.

[SeattleCPA]

Open a solo 401k before the end of the year. Also, remember that any health care premiums are deductible*. So is that new laptop that you bought for work.

The penalty is negligible. Don't stress about it.



* If you don't have coverage from your wife's work.

Agree with the point about negligible penalty... in fact, based on your modest profits for the first two quarters, you may not owe a penalty if you use the 2210 Form.

One clarification. Pension deductions and SE health deductions won't help minimize your SE taxes... and those are most of what you owe obviously. The only way to grind those down would be to use something like an S corporation... something you could do going forward but not going backward. (BTW if you did use an S corporation, the pension and the SE health stuff can save you both income taxes and SE taxes...)