Author Topic: Recently self-employed: quarterly tax payments?  (Read 6215 times)

Jack

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Recently self-employed: quarterly tax payments?
« on: January 10, 2013, 08:15:24 AM »
My wife accepted a job in October that classified her as an independent contractor (1099) and didn't withhold taxes. Does she need to make a quarterly tax payment by January 15th? If so, how do I calculate the amount?

Jack

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Re: Recently self-employed: quarterly tax payments?
« Reply #1 on: January 10, 2013, 08:35:26 AM »
A related question: apparently, the penalty for failing to pay estimated taxes is 4%. Given that I have debt at rates above 4%, should I purposefully not make the quarterly payment and use the money to pay down other debt instead?

sherr

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Re: Recently self-employed: quarterly tax payments?
« Reply #2 on: January 10, 2013, 09:00:18 AM »
A related question: apparently, the penalty for failing to pay estimated taxes is 4%. Given that I have debt at rates above 4%, should I purposefully not make the quarterly payment and use the money to pay down other debt instead?

I don't know the answer to your first question, but the answer to this one is: it depends.

I expect that the 4% for the taxes is a flat penalty, whereas the > 4% on your debts is an annual interest rate. So if by not paying taxes this quarter you would get to keep your money for an *extra year* at a cost of a 4% fee, it's equivalent to a 4% annual interest rate and you are mathematically better off paying your higher-interest debts first. However, if it's towards the end of the year and not paying taxes would cost you 4% for keeping your money only an *extra quarter*, then that would be more similar to a 16% annual interest rate and it's probably a good idea to pay.

Of course, the best thing would be to get rid of your debt and not have to pay no one no extra nothin. ;)

Edit: I discovered I'm wrong, it is not a flat 4% fee if you don't pay on time. Rather, the IRS prorates the fee based on the number of days that you are "late" paying your quarterly taxes. So the "16%" part of what I said above is wrong. Source: Form 1040-ES instructions.

However I didn't find anywhere that actually listed what the fee is, and it looks like it is typically equivalent to a 5-8% annual rate. It might be possible to come out ahead mathematically by delaying payment, but I'd say go the safer route and don't annoy the IRS.
« Last Edit: January 10, 2013, 09:59:33 AM by sherr »

mugwump

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Re: Recently self-employed: quarterly tax payments?
« Reply #3 on: January 10, 2013, 09:08:11 AM »
I'm not a tax expert, but I have done contract work and filed quarterly taxes.  Quarterly taxes need to be paid Jan 15th for the previous quarter (4th quarter 2012), and on Apr. 15th for 1st quarter 2013.  Penalties apply on your 2012 return not only if you didn't pay enough taxes for the previous year, but if you didn't pace the quarterly payments properly. In other words, if you earned all your money the first half of the year, and didn't pay the appropriate amount of tax during the first two quarterly payments, you will owe a penalty even if you make the payment in January. And don't forget you have to add social security and medicare for both the employer and employee rates.  If you're already in the 15% bracket, that adds up to approximately 30% of whatever you earn, minus deductions. If your taxes are higher than what you owed the previous year, you do get a break from the penalties.

I had contract work that started in July one year, started paying taxes in September, and Turbotax tried to make me pay the penalty because it assumed I earned the money throughout the year.  I had to really dig to find the form I knew existed to show how my earnings were distributed.

As you can see, it gets complicated.  If this is your first time self-employed, you may want to find a tax expert.  If she can find legitimate deductions for the contract work, she could earn her fee many times over.

Jack

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Re: Recently self-employed: quarterly tax payments?
« Reply #4 on: January 10, 2013, 10:23:59 AM »
As you can see, it gets complicated.  If this is your first time self-employed, you may want to find a tax expert.  If she can find legitimate deductions for the contract work, she could earn her fee many times over.

This isn't her first time "self employed." (I write that in quotes because she isn't really self employed; companies in her field just like to pretend that's the case for the purpose of tax evasion.) There really aren't any deductions she qualifies for: she hasn't bought any new equipment this year, she commutes to the client's office (just like a regular employee would), she's on my employer-subsidized health insurance, and there's no travel involved.

Jamesqf

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Re: Recently self-employed: quarterly tax payments?
« Reply #5 on: January 10, 2013, 11:28:29 AM »
She should make a payment, but probably shouldn't have a problem with any reasonable amount.  IIRC, she (or both of you, if filing jointly) need to pay either 1) Your total tax liability for the prior year; or 2) 90% of what your actual liability will be for this year.  (But download the 1040-ES instructions from the IRS web site to be sure.)  This also includes witholdings for tax/SS if she worked as an employee earlier in the year, and your withholding.

I agree that the instructions are too darned complicated, especially when your income is variable and unpredictable, as mine is.   I generally resort to just dividing last year's taxes by 4.

It's also quite possible to deduct any number of things that you wouldn't expect*, e.g. home office expenses.  Of course the specifics are going to depend on her particular work, so read through the IRS pubs for ideas.

*I've even toyed with the idea of deducting a portion of the expenses for my "home security system", but am not sure whether dog food and vet bills would qualify.  I mean, one of them is supposed to be a pit bull, and I have lots of computer equipment...

Jack

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Re: Recently self-employed: quarterly tax payments?
« Reply #6 on: January 10, 2013, 12:28:39 PM »
It's also quite possible to deduct any number of things that you wouldn't expect*, e.g. home office expenses.  Of course the specifics are going to depend on her particular work, so read through the IRS pubs for ideas.

The rule is that you have to conduct most, if not all, of your business in the home office. She works full time at the client's office, so she can't claim that deduction. The only thing she actually could claim is her Wacom tablet and her portable hard drive, but they were claimed (fully) on previous returns.

She really is a W-2 employee in all but name; if I thought we'd come out ahead by reporting her company to the IRS for tax evasion, I'd do it.

mugwump

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Re: Recently self-employed: quarterly tax payments?
« Reply #7 on: January 10, 2013, 01:50:20 PM »

She really is a W-2 employee in all but name; if I thought we'd come out ahead by reporting her company to the IRS for tax evasion, I'd do it.

Been there, done that.  Some employers seem to be able to get away with it.

If she had more than one employer that she commuted to, there would be possible deductions with travel expenses and home office.  With only one employer, you're pretty much stuck with all the income.  That's the situation I was in, too.

Jack

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Re: Recently self-employed: quarterly tax payments?
« Reply #8 on: January 10, 2013, 02:11:05 PM »
It really seems to be standard operating procedure for her whole industry (she creates art for online causal games), at least in our area. Something like 3 out of 4 of her last employers have done it (some temporarily, some for the whole time she was employed with them).

It may also have something to do with the fact that just about all the companies in this field around here are startups (Georgia has a tax credit for it), but I sort of doubt they pull this kind of bullshit with the programmers.

Jamesqf

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Re: Recently self-employed: quarterly tax payments?
« Reply #9 on: January 10, 2013, 02:47:19 PM »
...but I sort of doubt they pull this kind of bullshit with the programmers.

I don't see it as BS myself.  I am a programmer (though not games - I do things like seismic tomography) and much prefer working as a contractor.  Of course I don't work for just one employer, and mostly work from home for clients as far apart as Silicon Valley and Switzerland.

If she plans on doing this sort of work going forward, that's something she should look at to get the full benefits of independent contractor status: multiple clients and working at least partly from home.

Jack

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Re: Recently self-employed: quarterly tax payments?
« Reply #10 on: January 10, 2013, 03:01:59 PM »
...but I sort of doubt they pull this kind of bullshit with the programmers.

I don't see it as BS myself.  I am a programmer (though not games - I do things like seismic tomography) and much prefer working as a contractor.  Of course I don't work for just one employer, and mostly work from home for clients as far apart as Silicon Valley and Switzerland.

If she plans on doing this sort of work going forward, that's something she should look at to get the full benefits of independent contractor status: multiple clients and working at least partly from home.

You don't understand: they don't pay as if it's contracting work; they pay similar hourly rates as W-2 employers and hope people don't notice. It's also still a normal 9-5 M-F 40-hour work-week (give or take flex-time), except that they can send you home and not pay you when there isn't enough work.

It really is nothing more than an excuse to avoid paying taxes and benefits.

kkbmustang

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Re: Recently self-employed: quarterly tax payments?
« Reply #11 on: January 10, 2013, 06:01:15 PM »
...but I sort of doubt they pull this kind of bullshit with the programmers.

I don't see it as BS myself.  I am a programmer (though not games - I do things like seismic tomography) and much prefer working as a contractor.  Of course I don't work for just one employer, and mostly work from home for clients as far apart as Silicon Valley and Switzerland.

If she plans on doing this sort of work going forward, that's something she should look at to get the full benefits of independent contractor status: multiple clients and working at least partly from home.

You don't understand: they don't pay as if it's contracting work; they pay similar hourly rates as W-2 employers and hope people don't notice. It's also still a normal 9-5 M-F 40-hour work-week (give or take flex-time), except that they can send you home and not pay you when there isn't enough work.

It really is nothing more than an excuse to avoid paying taxes and benefits.

Look up Revenue Ruling 87-41 on www.irs.gov.  If she is treated just like other employees who are receiving benefits, etc. the company could have a serious issue. You can also look up the Microsoft case online. Just google "Microsoft" & "independent contractor" and it should come up. There's a form with the IRS she can file to request a determination be made by the IRS. She could use that as a negotiation tactic to get a higher rate per hour or better work arrangements. Especially if she's working side by side W-2 employees. Sounds fishy to me.

Jamesqf

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Re: Recently self-employed: quarterly tax payments?
« Reply #12 on: January 10, 2013, 08:44:51 PM »
Yeah, that was the point I was trying to make: because she is currently working exactly like a W2 employee, she has a certain amount of leverage that might be used to get her working conditions more in line with what a real contractor's would be.  If she can do that, then there are numerous work-related expenses that can be deducted.

Jack

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Re: Recently self-employed: quarterly tax payments?
« Reply #13 on: January 10, 2013, 09:20:08 PM »
I'd be worried her employer would be more likely to retaliate than negotiate.

As it is, she's been asked to stay home (without pay, of course) several times over the last few weeks because the company doesn't have enough work to assign or cash flow to pay her. And this is one of the more well-established companies she's worked for!

Now, at my job I'd have room to negotiate (the boss/owner showed up in a Fisker Karma today... WTF!), but my wife genuinely doesn't.

kudy

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Re: Recently self-employed: quarterly tax payments?
« Reply #14 on: January 10, 2013, 11:09:32 PM »
The IRS has really amped up the random audits on contract employees in the past few years - I'd say it's almost likely they will be audited and heavily fined for not being in compliance, especially if they do this to a lot of "employees."

kkbmustang

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Re: Recently self-employed: quarterly tax payments?
« Reply #15 on: January 10, 2013, 11:50:58 PM »
The IRS has really amped up the random audits on contract employees in the past few years - I'd say it's almost likely they will be audited and heavily fined for not being in compliance, especially if they do this to a lot of "employees."

+1 on this. Big time.