I've done my own taxes the last couple years, including my taxes for 2010, the first year I was self-employed. I didn't have to pay any estimated taxes in 2010 as it was my first year of self-employment, and because I had no taxable income in 2009. In 2010, my only taxes were about $1100 of SE tax, which after $800 worth of credits, got me to write a $300 check to the IRS.
For some reason, I got it in my head that since I paid no income taxes in 2010, I wouldn't have to pay estimated taxes this year. I also read that you are not required to pay estimated taxes if you expect to owe less than $1000 in taxes. Since I only wrote the IRS a check for $300 last year, I expected to owe them about $300 again this year which is still <$1000. Unfortunately, I've made twice what I made last year. I also realized that, yes, self-employment tax is supposed to be included in estimated taxes, and lastly, that $1000 in "total taxes" is before the tax credits, not after. So, it looks like I'm going to pay some penalties. I'll owe no income taxes and $2,000 of SE taxes and have paid nothing in estimated taxes.
My questions are: 1. If I file my 2011 1040 before Jan 15 2012, can I avoid the penalties on the last quarter?
2. Is there anyway I can decrease penalties by paying sooner than Jan 15 for three quarters that have come and gone? Or can you only pay at those set times?
3. Does anyone have a ballpark idea how severe the penalties are? For $2000 worth of taxes, would I pay them $5, $50, $500? I have no idea.
Oh, the fun of learning from your mistakes.
Estimated Tax Penalty Questions
I have underpaid in the past, and although it's a typically convoluted calculation (only $1k above, etc), I believe it's only a few percent. I think you only get big fines if you are trying to cheat.
http://www.irs.gov/pub/irs-pdf/f2210.pdf
http://www.irs.gov/pub/irs-pdf/f2210.pdf
The rules for penalties are very complicated. So complicated, that as a tax professional, I don't even try to understand all of them. If you look them up you'll see that the IRS recommends that you let them calculate your penalty, if any.
However, I can give you a ballpark estimate. Even if you do nothing but pay your tax with your return, most likely the IRS will decide you owe nothing, but I'd start planning for next year. If they really want to give you a hard time it would most likely be 10% of the amount more than $1000 greater than last year, or about $100. They can tack on other fees and penalties (up to an additional 40%) if they think you should have known better and suspect you are trying to scam them, but it doesn't seem that way from your description.
Remember that the fourth quarter payment isn't due until Jan 15th. I don't see any reason that you can't send in your estimated tax at that time (not with your return, do that separately later). Who's to say you made that "extra" money in the first half of the year? You could have had a great fourth quarter. Just get in the habit of estimating your tax quarterly and filling in those forms. It's not that bad once you get the hang of it.
However, I can give you a ballpark estimate. Even if you do nothing but pay your tax with your return, most likely the IRS will decide you owe nothing, but I'd start planning for next year. If they really want to give you a hard time it would most likely be 10% of the amount more than $1000 greater than last year, or about $100. They can tack on other fees and penalties (up to an additional 40%) if they think you should have known better and suspect you are trying to scam them, but it doesn't seem that way from your description.
Remember that the fourth quarter payment isn't due until Jan 15th. I don't see any reason that you can't send in your estimated tax at that time (not with your return, do that separately later). Who's to say you made that "extra" money in the first half of the year? You could have had a great fourth quarter. Just get in the habit of estimating your tax quarterly and filling in those forms. It's not that bad once you get the hang of it.
Who's to say you made that "extra" money in the first half of the year?
If there's an audit, the payment dates would show this. Unlikely, but not something I'd want to risk.
Form 2210 is where you figure your underpayment penalty (or if you even have a penalty at all). You should estimate your earnings for the rest of the year and fill out this form NOW. Making your entire tax payment for tax year 2011 now can knock off a lot of the penalty. Penalty reduction is based on the number of days before April 15. So sooner the better for doing this. Fill out the form to see if making a big 4th quarter estimated tax payment would be to your benefit.
(just running the numbers quickly now, a $2k tax would incur about a $50 penalty. Paying by Dec 1 knocks it down to less than $25).
If there's an audit, the payment dates would show this. Unlikely, but not something I'd want to risk.
Form 2210 is where you figure your underpayment penalty (or if you even have a penalty at all). You should estimate your earnings for the rest of the year and fill out this form NOW. Making your entire tax payment for tax year 2011 now can knock off a lot of the penalty. Penalty reduction is based on the number of days before April 15. So sooner the better for doing this. Fill out the form to see if making a big 4th quarter estimated tax payment would be to your benefit.
(just running the numbers quickly now, a $2k tax would incur about a $50 penalty. Paying by Dec 1 knocks it down to less than $25).
rachels: I think you have some good ideas from the above responses. But I would also mention another possible route to fix the problem: buy something for your business before the end of the year and eliminate your tax liability. (I'm no accountant, so do your own research...)
Also suggest you dig deeply into all your expenses and push as much as reasonably possible (& legal) onto the business.
Also suggest you dig deeply into all your expenses and push as much as reasonably possible (& legal) onto the business.
It will be nowhere near $50. You are only required to pay in the lesser of 90% of your actual 2011 tax or 100% of your 2010 tax. So you will only pay underpayment penalty on $300. You can still mail the check in now to mitigate the penalty, you don't have to wait to file your return. But even if you wait until April 15th or later, the penalty will only be a few dollars.