quarterly withholdings question

[michaelrack]

Advertisement - Members don't see this ad

Do federal quarterly income tax withholdings have to be the same amount, or could I do (for example) $1000, $1000, $1000, $25,000?

 

[southerndoc]

Do federal quarterly income tax withholdings have to be the same amount, or could I do (for example) $1000, $1000, $1000, $25,000?

The same amount based on your estimated taxes. If you underpay on a quarterly basis, you could be fined with interest and penalties.

You should really consult a CPA when you're making that kind of money and not try to do your taxes yourself.

 

[AndyFromMDTAXES]

The reason to remit quarterly estimated tax payments is to avoid being assessed an underpayment penalty by the IRS. Each year, you need to pay in the lesser of 90% of your current year's tax liability or 100% (increased to 110% if your AGI exceeded $150k last year) of your prior year's tax liability through withholdings and estimated taxes paid in evenly over the year.

If you meet this "safe harbor", you won't be penalized by the IRS, no matter how much you owe on 4/15. If you fall short, expect to be assessed a penalty equal to about 4% of the short fall.

One more thing. If you don't earn your income evely over the year, you do not need to remit your estimates evenly. You can base your estimates each quarter on the income earned during the quarter. You then need to attach a From 2210 to your tax form, showing how much you earned each quarter.

I hope this helps you out.

 

[michaelrack]

Thanks for the info. I do have a CPA. I believe every practicing physician should have a lawyer and a CPA. I will see him in March and follow his advice exactly, which will probably be to pay the same amount each quarter.
thanks

 

[wipedown]

For people who pay significantly less taxes during the prior year (ex: PGY1's pay 1/2 the taxes during their first tax year), is it a safe idea to withhold as much as possible next year and put it into 4% savings?

 

[Sol Rosenberg]

Do federal quarterly income tax withholdings have to be the same amount, or could I do (for example) $1000, $1000, $1000, $25,000?

Ahhh, estimated tax payments. If you want to make them and not be subject to a penalty, they generally need to all be the same amount. However, if your income varies greatly during the year, you can make unequal payments (reflecting, proportionally, your income variation during the year.) There is a whole separate form/worksheet to fill out to see if you can do this.

However, the whole underpayment penalty is something that scares people more than it should, IMHO. Southerdoc mentioned "penalties + interest," but that's not completely correct. The underpayment penalty is essentially interest on the difference between what you should've paid (on the date that it should've been paid) and what you actually paid. The penalty rate is 8% annually (for 3/4 estimated tax payment dates) and 7% annually for 1/4 payment dates. So, it's more like just interest. Therefore, I generally choose NOT to make estimated tax payments, gambling that I can earn more than that through investing that $$$ throughout the year.

This isn't really a gamble (for me, at least) for a reason that I will explain. First there is the Safe Harbor provision that was previously described. Also, it sounds like you are self-employed. However, if you also have some income from wages, the IRS counts all withholdings as if they are contributed equally throughout the year. Thus, during Dec, you can increase your withholding to pay the tax you were supposed to pay through estimated tax payments, and NO PENALTY.

But, if you are not 100% comfortable in your understanding of all of this, by all means, like others said, GET A CPA! (EDIT: Whoops, looks like you already do!)

 

[Sol Rosenberg]

For people who pay significantly less taxes during the prior year (ex: PGY1's pay 1/2 the taxes during their first tax year), is it a safe idea to withhold as much as possible next year and put it into 4% savings?

You mean withhold as LITTLE as possible (or withhold withholding as much as possible 🙂 )

YES! (As long as you actually do put it in a savings account and don't spend it)....and make sure that you withhold at least 90% of you last year's income tax.