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Q: estimated tax/avoiding penalty ( Answered 3 out of 5 stars,   1 Comment )
Subject: estimated tax/avoiding penalty
Category: Business and Money > Accounting
Asked by: tommybiegs-ga
List Price: $10.00
Posted: 25 Nov 2006 17:57 PST
Expires: 25 Dec 2006 17:57 PST
Question ID: 785583
I'm self-employed, and about 1/3 of my income comes from a single
client, who years ago switched me from 1099-MISC to W-2.  The
remainder of my income comes from my other clients who all file
1099-MISC.  Usually the withholdings from this one W-2 client
(combined with my own business deductions, health insurance, 401(c)
contributions, etc.) are enough to either cover all my federal and
state taxes, or leave me owing an insignificant amount.  This year,
however, I did an unexpectedly large amount of business in October and
November through a new client, and I'm concerned I might owe more than
$1,000 in taxes come April 15, 2007 because of this.  I have made no
quarterly estimated tax payments in 2006.

My question is this: can I make the fourth quarter estimated tax
payment in January 2007 to pay down (or pay off) my federal and state
tax liability for 2006 even if I missed the first three quarterly
estimated tax deadlines?

Request for Question Clarification by sublime1-ga on 25 Nov 2006 18:37 PST

I wouldn't even bother with the 4th quarter estimated tax payment
if the extra income from the new client is not likely to repeat
next year. If it is, then your plan sounds fine. The income was
unexpected and didn't occur until the last quarter. I doubt the
IRS will have any objections to receiving their money a little
earlier than March, and most people would probably wait 'til then.

Let me know your thoughts...


Clarification of Question by tommybiegs-ga on 26 Nov 2006 15:03 PST

Thanks for your response.  I know that if I'm expecting the income
year after year, I'm required to "pay-as-I-go" according to the
quarterly estimate schedule.  Unexpected or not, however, there's a
good chance that for the 2006 tax year, I'm going to owe over the
$1,000 ceiling where the penalty kicks in.  I want to avoid this tax
penalty, even if there is only a slim chance I'll wind up owing more
than $1,000.

Are you suggesting that even if I wind up owing over the penalty
minimum, say $1,500 or $2,000, that I should still not bother with the
4th quarter payment and just pay the balance in full before April 15? 
Won't I be penalized?

Request for Question Clarification by cynthia-ga on 26 Nov 2006 15:53 PST
What I would do is immediately turn in a new W-4 to your W2 Employer.
On Line 6, elect to send them $500-$1,000 dollars or so--before
December 31.

Look at the W-4, line 6 here:
Line 6 is there for non-wage income reporting, usually dividends or
interest, but self-employment income certainly applies. You can prepay
taxes to keep you under the limit and avoid all penalties.

If this suffices as an answer for you, let me know.
Subject: Re: estimated tax/avoiding penalty
Answered By: richard-ga on 26 Nov 2006 18:55 PST
Rated:3 out of 5 stars
Hello and thank you for your question.

Yes, you can make a fourth quarter estimated tax payment, on January
15, and you'll eliminate any penalty for the year.  The trick is to
elect the "Annualized Income Installment Method" as explained in
Publication 505, and to file Form 2210 with your tax return for 2006.

If you have the patience to work through the example given below,
you'll get it right!
Annualized Income Installment Method

Form 2210
Form 2210 Instructions

Thanks again for letting us help

Search terms used:
quarter estimated tax
"annualized income installment"
tommybiegs-ga rated this answer:3 out of 5 stars
I found the Clarifications and Comments more helpful than the actual
answer... I had already read that page on the IRS website before
coming here (if I could understand the IRS's obfuscating instructions
I wouldn't need an answer from an expert).

Subject: Re: estimated tax/avoiding penalty
From: abezon-ga on 26 Nov 2006 20:23 PST
There is no penalty unless you owe more than $999 AND your total
withholding from W-2s & 1099s is less than last year's total tax
liability. Dig out your 2005 1040 & look at the 'Total Tax' - line 63
- & check your latest paycheck to see if you've paid in that much. If
you have, you're fine. If not, try to have your w-2 employer withhold
a little more from your December check. If that won't work, you should
send in an estimated payment to get your total payments up to last
year's line 63. Then you'll file form 2210 & annualize your taxes.

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