Side hustle tax question - do I need to pay estimated tax throughout the year?

[a1pharm]

Hi all,

I was hoping someone could clear up a question for me, but first some background:

I will be employed full time in 2017.  My wife will be employed full time in 2017 until mid-October, then she will quit her job.

We will have our first child in 2017 (hooray!).

We will file our taxes as married filing jointly.

Our combined AGI from our jobs will be about $145k, and taxes are withheld by our employers.  We put the legal max into our 401k/403b, and fully fund 1 HSA and partially fund 1 HSA.

I now have a side hustle where I make $800 per month and am contracted to do so for all 12 months in 2017.  This side hustle will gross exactly $9,600 in 2017.  No tax is withheld on this money, so I will (obviously) have to pay it myself.

Here's my question: do I need to pay estimated tax throughout the year (with form 1040-ES), or can I just pay it when I do my regular tax return (essentially my refund will be reduced by the amount of tax I owe on the $9,600).  I don't want to pay a penalty (I have read that can happen if you don't pay your estimated tax), but I can't find clear information on what I need to do.

Please help me, mustachians!

[seattlecyclone]

There are a few "safe harbors" that if you meet them you won't have to pay any penalties. One of them is if you have at least 100% of your previous year's total tax withheld (or 110% if you make at least $150k) you won't owe a penalty, you'll just have to pay the extra at tax time.

If you don't want to mess around with estimated tax payments, you can increase your withholding a bit at your regular job. The IRS is perfectly happy to receive their money that way.

[a1pharm]

So my tax withholdings this year will be the same as last year, so that must mean I'm in a safe harbor.

But what about next year?  Will I have to pay estimated tax then?

[Catbert]

The easiest thing is to just adjust the withholding on your day job.  So if you say "married w/ 2 deductions" just adjust to "married w/2 deductions +$100 per pay period" (or whatever it will take to pay the anticipated taxes on the extra income).

If you've been getting refunds you don't have a problem.

[seattlecyclone]

So my tax withholdings this year will be the same as last year, so that must mean I'm in a safe harbor.

But what about next year?  Will I have to pay estimated tax then?

You always have to pay as you go, whether through payroll withholding, estimated taxes, or some combination. There are various rules about whether you've paid "enough" as you went along to avoid penalties. The safe harbor I mentioned is one of them, but it's up to you to make sure that the amount you have withheld is actually more than 100% (or 110%) of your 2016 tax liability.

In 2018 the same rules apply: you'll need to pay at least 100% (or 110%) of your 2017 taxes throughout 2018 in order to meet the safe harbor rules.

[MDM]

So my tax withholdings this year will be the same as last year, so that must mean I'm in a safe harbor.

Not necessarily.

See Who Must Pay Estimated Tax for the IRS descriptions.