[shifuimam]

Boyfriend is currently in school full time and doing contract work for his previous employer - which means that taxes are not being withheld from the paychecks that come from that work. He also earns a modest income from donations on the online gaming servers he runs.

I've looked at the documents from the IRS - both federal and state - with regards to self-employment estimated income and making the necessary quarterly tax payments, but I'm really confused - it seems like he won't have to pay quarterly taxes since all of his income is coming from self-employment. Is that correct? If not, how are we supposed to estimate his income? There is absolutely no predicting what contract work will be available for him through this year, nor can we adequately estimate the income from his gaming stuff (he previously claimed that as extra income when he filed his taxes annually, but that was when he had a normal full-time job).

So what's right? Should we try to estimate his taxes based on nothing, or should we wait until April 2010 to file his 2009 income and pay the necessary taxes?

[Big Mac]

You can make estimated payments, but you're right that it's a pain trying to calculate them. You will not get penalized by calculating and paying the full SE tax amount in April, but your guy needs to make sure to save a portion of what he makes so that there will be enough to pay the taxes on it in April.

[BLAZE_MkIV]

You have to pay in 1/4 allotments or you will get fined. Make a good faith estimate and go with that. Then file at the end of the year to cover any discrepancies. If your really concerned the lawyers wrote the laws so the lawyers could read them.

[shifuimam]

The problem with making a good faith estimate is that we have no idea what that could be. Boyfriend could end up having only one more contract paycheck before the end of the year, or he could end up working steadily through December. The payment discrepancy would be major - thousands of dollars. Having the money available to pay the taxes in April is a nonissue - but would we be facing a large fine if we wait to pay everything until tax season?

[Big Mac]

Originally Posted by BLAZE_MkIV 

You have to pay in 1/4 allotments or you will get fined. Make a good faith estimate and go with that. Then file at the end of the year to cover any discrepancies. If your really concerned the lawyers wrote the laws so the lawyers could read them.

I don't think that's true. It's suggested but not required for the self-employed to make estimated payments.

[torsoboy]

Originally Posted by Big Mac 

I don't think that's true. It's suggested but not required for the self-employed to make estimated payments.

I get fined every year for not paying quarterly taxes on my income. But the fines are relatively small (something like 4% of the taxes that should have been paid), and I prefer the fine over bothering with quarterly taxes.

[BLAZE_MkIV]

Estimated Taxes are their instructions. I bet you could repeat this after every quarter to adjust the payment for that quarter so you are close instead of overpaying.

[Dork.]

Not an accountant, but I'm dealing with some of these issues now....

The IRS wants its money, and it wants it over the course of the year. If he waits until he files his taxes in April and he owes a lot, he will be paying penalties in addition to his taxes. The alternative is to come up with some sort of estimate, and if you end up overpaying you can get it back when you file. (File before Jan 15th and you don't have to make the last payment.)

If he has any employment income, he can just increase his withholding to cover both his wages and his self-employment income instead of filing quarterly. The IRS doesn't care how you pay your taxes, all they care about is that you pay over the course of the year and you don't owe too much at the end of the year. The same applies after you get hitched, if he is mooching off your steady job -- if you file jointly, your wage withholding can cover both of you.

In addition to the normal income tax, self-employed people are stuck with both halves of the social security and Medicare taxes. (Employees pay only half of those taxes, their employers pay the other half). But, since an employer is able to claim that tax as a deduction, self-employed folks can also take a deduction for the half that the employer would usually pay.

Simple, huh?

[Sage]

I’m also a contract worker. There’s a certain threshold below wish you don’t have to make quarterly payments – I don’t know what it is (I’m hugely lazy and so I let TurboTax do everything for me, even though I know it’s probably having me overpay).

[Maflynn]

No offense to the OP but I think the best advice for tax and legal issues are best left to the experts. I'd rather trust an accountant on what to do about taxes then asking an internet forum.

Just look at this thread, one person said you need to provide quarterly payments and another refuting that. While I do believe quarterly payments are required I think the OP is best suited to talking to an accountant to ensure the tax situation is straightened out

[shifuimam]

I would, except that CPAs are freaking EXPENSIVE. We're talking like $150 an hour just to do this stuff. I'm not spending that kind of money when the income were talking about is, thus far, less than $15,000.

This is the part that has me wondering:

You expect your withholding and credits to be less than the smaller of;

*90% of the tax to be shown on your 2009 tax return, or
*100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

100% of tax he's going to owe for the 2009 tax year, provided he doesn't get a job this fall (which is likely; he'll be in school full time at 15-18 credit hours per semester), is going to be from self-employment (contract work) and other income (his gaming stuff). The above quote makes it sound as if you don't have to pay quarterly if 90% or more of your taxes come from self-employment income.

[ghporter]

It IS just an estimate. A good faith estimate is hard to argue-and you don't have a clue whether he'll get another job or not. If he DOES get another job-one where someone else handles payroll taxes, then it's not an issue.

[Dork.]

Originally Posted by shifuimam 

You expect your withholding and credits to be less than the smaller of;

*90% of the tax to be shown on your 2009 tax return, or
*100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

100% of tax he's going to owe for the 2009 tax year, provided he doesn't get a job this fall (which is likely; he'll be in school full time at 15-18 credit hours per semester), is going to be from self-employment (contract work) and other income (his gaming stuff). The above quote makes it sound as if you don't have to pay quarterly if 90% or more of your taxes come from self-employment income.

Sorry to split hairs, but the source of the income doesn't matter: what the IRS wants up front is either -
90% of your 2009 taxes (this is the estimate),
or 100% of the tax you owed last year (this is not an estimate: it's what you actually owed on the return).

The IRS wants this either through withholding or through quarterly payments. If he has no withholding, the absolute safest thing to do would be for him to pay 100% of what he owed last year spread across the four quarterly payments. But if his income for this year is going to be much lower than last year, that will be paying way too much (even if you will get it back when you file), so your choices are to either guess at the taxes for this year and pay 90% of that, or guess low and pay the penalty at the end of the year.

BTW, if he hasn't sent in any quarterly payments this year, he already missed the first two (April and June). The next one is September 15th..

[Doofy]

...

Originally Posted by Edward J. Gurney

The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it.

[Maflynn]

Originally Posted by shifuimam 

I would, except that CPAs are freaking EXPENSIVE. We're talking like $150 an hour just to do this stuff. I'm not spending that kind of money when the income were talking about is, thus far, less than $15,000.

And yet, I'd venture that a meeting with a CPA to clear out exactly what you need to do is a lot cheaper then the penalties, back-taxes you may have to pay if you made a mistake based on free advice from the intarweb

[shifuimam]

Originally Posted by Maflynn 

And yet, I'd venture that a meeting with a CPA to clear out exactly what you need to do is a lot cheaper then the penalties, back-taxes you may have to pay if you made a mistake based on free advice from the intarweb

If he was going to be making a lot of money, maybe, but I don't think that the penalty will be that great on the amount he's making (particularly when you factor in the ~$4500 standard deduction for filing as a single person with no dependents).

[ShortcutToMoncton]

Is there no tax exemption for students in the US? Or does he just make way too much?

I've never had to pay taxes on my income if I was in university for that year. Granted I only worked in the few months I was off school but I certainly made more than 15k.

greg

[torsoboy]

Originally Posted by Dork. 

Sorry to split hairs, but the source of the income doesn't matter: what the IRS wants up front is either -
90% of your 2009 taxes (this is the estimate),
or 100% of the tax you owed last year (this is not an estimate: it's what you actually owed on the return).

The IRS wants this either through withholding or through quarterly payments. If he has no withholding, the absolute safest thing to do would be for him to pay 100% of what he owed last year spread across the four quarterly payments. But if his income for this year is going to be much lower than last year, that will be paying way too much (even if you will get it back when you file), so your choices are to either guess at the taxes for this year and pay 90% of that, or guess low and pay the penalty at the end of the year.

BTW, if he hasn't sent in any quarterly payments this year, he already missed the first two (April and June). The next one is September 15th..

This is correct. But like I said before, the penalties are so small, that it's sometimes more of a burden to do the quarterly taxes than to just take the penalty. Especially with his low income level. It would be cheaper to take the penalty than talk to an accountant about it.

For example, I owed over $20k in taxes two years ago, and the penalty was ~$500. For the little amount that he will be owing, I wouldn't worry about it.

[torsoboy]

Originally Posted by ShortcutToMoncton 

Is there no tax exemption for students in the US? Or does he just make way too much?

I've never had to pay taxes on my income if I was in university for that year. Granted I only worked in the few months I was off school but I certainly made more than 15k.

greg

They don't discount you for being a student, but students generally make below the threshold that requires taxes to be paid. You still pay social security, etc., but you generally the "taxes" portion back at the end of the year.

[Person Man]

Originally Posted by ShortcutToMoncton 

Is there no tax exemption for students in the US?

Nope. No tax exemption for students.

When I was in college I had a job that paid $750 a quarter, and I had taxes withheld from it. Granted, I usually got the federal and state taxes refunded at the end of the year because the standard deduction took my yearly income to below what you start owing taxes on, but if I had made enough, I would have had to pay taxes. And of course I didn't get back the Social Security/Medicare taxes that were withheld...

[ShortcutToMoncton]

You still had to pay taxes, and then got back a refund at the end of the year?

Here in Canada you get education credits. For example the minimum threshold for a single person is 8 thou (or something like that... maybe 12 thousand? I dunno), but the cost of tuition is added to this, and you're given a set credit for living expenses (e.g. 400 a month for 8 months or whatever). I always made between 15-20 grand for slightly over 3 months work, so I was over the basic exemption... but when you add the school credits it was always enough to get all my taxes back.

Furthermore, while you can pay taxes "at the cheque" and get a refund later, I always made sure that the company didn't take any fed/prov taxes off at all. It doesn't make any sense to me to give the government ~3k for 8 or 9 months, and then get the exact same amount back. You're screwing yourself out of the interest.

Anyways, guess it's a lot different in the States....

greg

[SVass]

Originally Posted by BLAZE_MkIV 

You have to pay in 1/4 allotments or you will get fined. Make a good faith estimate and go with that. Then file at the end of the year to cover any discrepancies. If you are really concerned the lawyers wrote the laws so the lawyers could read them.

That is not quite true if your income is unevenly distributed. There is a special form to account for this (Isn't there always a special form?) and I do not remember the details. Anyway, they change the forms every year in some random fashion to provide employment. The fine is zero IF you get a lump sum near the end of the year; however, you could then pay the estimated amount on that in the January payment.

I went through this one year and I destroy my copies after the requisite number of years. (I also do not save incriminating email.)
sam

[besson3c]

Unrelated question: does one have to report income from non American companies? Is there anyway for the government to trace non-US earnings?

Just wondering...

[BLAZE_MkIV]

If the money never enters the US financial system then they wouldn't know it exists. But then you'd have a hard time spending it.

[Big Mac]

Originally Posted by besson3c 

Unrelated question: does one have to report income from non American companies? Is there anyway for the government to trace non-US earnings?

Just wondering...

The Obama Administration is expending a lot of resources to catch unreported overseas income, FWIW.

[besson3c]

Big Mac: not surprising... They can't tax cash gifts though, can they?

By the way, I'm sorry for the sarcastic "oh wise one" remark I made. If it makes you smile, that single comment was what resulted in my one week vacation apparently, so I guess extra mud is on my face for not only being snippy, but getting my ass banned too.

On the positive side, I'm back now!

[turtle777]

Originally Posted by besson3c 

Big Mac: not surprising... They can't tax cash gifts though, can they?

Why not ?

It just depends on the amount...

-t

[turtle777]

Originally Posted by besson3c 

Unrelated question: does one have to report income from non American companies? Is there anyway for the government to trace non-US earnings?

Just wondering...

Yes, already , under the current IRS guidelines, US citizens and green card holders are taxable with their worldwide income, no matter where they live and where they get it from.

-t

[Andy8]

Originally Posted by turtle777 

Yes, already , under the current IRS guidelines, US citizens and green card holders are taxable with their worldwide income, no matter where they live and where they get it from.

The land of the free. taxed

[besson3c]

Originally Posted by turtle777 

Why not ?

It just depends on the amount...

-t

But isn't a gift, by definition, something personal? If me as an individual decided to send you a Christmas check from Canada, why would you have to report it? If it came from a company I guess you'd have to report it, but couldn't you just sort of fudge things by saying that it was a gift? Even if the company put this on their books, how would the American government be able to access this, and what would make them think to investigate?

[Andy8]

Originally Posted by besson3c 

But isn't a gift, by definition, something personal? If me as an individual decided to send you a Christmas check from Canada, why would you have to report it? If it came from a company I guess you'd have to report it, but couldn't you just sort of fudge things by saying that it was a gift? Even if the company put this on their books, how would the American government be able to access this, and what would make them think to investigate?

New 2009 IRS Gift Limit Announced
Saturday November 29, 2008
The IRS recently announced an increase to it's annual gift limit, also known as the "annual exclusion," for the 2009 tax year. The new IRS gift limit will be $13,000 per year, per person.
For those unfamiliar with the IRS gift limit, it's the amount that any one person can give to a non-spouse in any one year, without incurring a gift tax. For practical purposes, a married couple can each give the full IRS gift limit, for a total of $26,000, to a recipient without violating gift tax rules.

The IRS gift limit effectively restricts the amount of money that can be placed in a college account for a child by any one person in any single year. However, Section 529 plans do allow an acceleration of five years' worth of gifts (totaling $65,000) as long as certain conditions are met.

Also: Frequently Asked Questions on Gift Taxes

[Big Mac]

Originally Posted by besson3c 

By the way, I'm sorry for the sarcastic "oh wise one" remark I made. If it makes you smile, that single comment was what resulted in my one week vacation apparently. . .

Ironically, I didn't even report that (or any other) post from you. Welcome back, for now.

[turtle777]

Originally Posted by besson3c 

But isn't a gift, by definition, something personal?

Wouldn't it be nice if that had any bearing ?

-t

[ghporter]

Originally Posted by turtle777 

Wouldn't it be nice if that had any bearing ?

-t

When someone doesn't know how "gifts" are handled for tax purposes, it DOES have a bearing. That besson doesn't know that it doesn't matter that a transaction is "private" or "personal" puts him in a position to make a very big goof and wind up in very big trouble. Andy8's post with the rules was the right way to address besson's point.

I'll add to that that any substantial monetary transfer is very hard to keep private. They got Al Capone not on murder or racketeering, but on tax evasion because they could show that he spent more money than he admitted he made for tax purposes... Really substantial money is very hard to hide, and it is often easily noticed, especially by the tax man.

[turtle777]

Originally Posted by ghporter 

When someone doesn't know how "gifts" are handled for tax purposes, it DOES have a bearing. That besson doesn't know that it doesn't matter that a transaction is "private" or "personal" puts him in a position to make a very big goof and wind up in very big trouble. .

Well, you are making my point. What I meant is that it would be nice if it [the gift being a personal matter] had a bearing, but I implied that it doesn't.

The IRS will not care if you knew or didn't. The rules are the rules.

-t

[BLAZE_MkIV]

Did you know that if you barter something, like trading a motorcycle for a car, baseball cards etc, Your expected to pay sales tax on it?

[turtle777]

Originally Posted by BLAZE_MkIV 

Did you know that if you barter something, like trading a motorcycle for a car, baseball cards etc, Your expected to pay sales tax on it?

F*** that.

-t

[andi*pandi]

Seek an accountant. $150 isn't that bad, and it will help you figure it out in future.

[ghporter]

Originally Posted by BLAZE_MkIV 

Did you know that if you barter something, like trading a motorcycle for a car, baseball cards etc, Your expected to pay sales tax on it?

Originally Posted by turtle777 

F*** that.

-t

There is no difference in obtaining value through providing a service (i.e. working for someone) than through trading chattels (property). If you "earn" more value (to you) than you give away, that's income. It's darn hard to quantify that value, and it requires keeping records diligently, but barter IS taxable.

These rules aren't intended to make every kid that trades two Shaq cards for one Elway card and a second card to be named later. Minor trading, even up to "you build the fence between our yards and I'll paint your house," are so insignificant that nobody really cares. The point is to prevent crafty folks from avoiding paying their share by characterizing everything they do as barter. In practice, an occasional barter isn't any big deal, any more than selling something for a "profit" on eBay. But again, when you present the appearance of spending more than you admit you earn, people are going to notice.

[shifuimam]

Originally Posted by andi*pandi 

Seek an accountant. $150 isn't that bad, and it will help you figure it out in future.

That's $150 per hour, and that's low - I saw plenty of CPA's for $200+/hr when I looked around online for local accounting firms. Plus I doubt that this will take one hour. It's just too expensive.

[Dakar V]

Can you really put a price on peace of mind?

[besson3c]

Originally Posted by Big Mac 

Ironically, I didn't even report that (or any other) post from you. Welcome back, for now.

Yeah, it will be interesting to see if there is some sort of new precedent being established there. The PL is dripping with sarcasm: people questioning reading comprehension, people questioning objectivity, entire posts that are sarcastic, and mockery which I suppose is a form of sarcasm. If this is a new standard I suppose that week long vacations will be increasingly common.

Not a complaint, I will abide, just an observation.

[besson3c]

Originally Posted by Dakar V 

Can you really put a price on peace of mind?

I don't know. Peace of mind can be a mind **** too. Taxes and bureaucracy such as the INS are supposed to be possible to get through without a lawyer for the vast majority of people. Sometimes people think they need a lawyer when the process is really cut and dry and can be managed independently with a little effort.

I tend to think that if you are interested in saving money something like a CPA should only come into play when you've truly reached the end of your rope, but not simply because you have a gut feeling that you will.

[Dakar V]

It was a joke, you ninny.

[besson3c]

Reported.

[Laminar]

Originally Posted by Dakar V 

It was a joke, you ninny.

Are you looking for a ban, oh wise one?

[andi*pandi]

Originally Posted by shifuimam 

That's $150 per hour, and that's low - I saw plenty of CPA's for $200+/hr when I looked around online for local accounting firms. Plus I doubt that this will take one hour. It's just too expensive.

Yes, this is still not bad. We pay an accountant $300 to do our taxes. I'm not sure how many hours that works out to for her, but presumably a worthy accountant could answer your main question in less than an hour.

[ghporter]

If your taxable income is 50k, then $300 to do your taxes is a (deductible) drop in the bucket. If it's more like $15k, that's a whole 2% of your income-NOT a drop in the bucket, even if it is deductible.

Around tax time there are lots and lots of free places that provide tax assistance, but when you are looking at a quarterly requirement, those places are not available. I'd suggest finding a NON-CPA tax preparer. Not just "Hi, I'm Bob and I'll do your taxes for you!" but someone with a proven track record. A former coworker had a side-business of doing personal and corporate taxes in his off hours, and it was a good choice for him after he retired. He's not a CPA, but he has years of experience with applying the (enormous volume of) rules. You don't really need an "accountant" to figure out your taxes, you need someone with experience with those blasted rules, someone who can translate Tax-ese into English. These folks are a LOT less expensive, and can give you the help you need. Don't go to H&R Block or some other big chain, look for an independent, because in order to survive, an independent tax preparer MUST have his stuff together and do things right.