iceflow

This may be a bit off topic for this site but there are quite a few folks who seem to enjoy the topic of tax. I'm trying to find out the following:

If someone makes estimated quarterly tax payments, do such payments include the SS / Medicare portions or is that sent as a separate payment?
If 'all in one', how does the IRS split that out from the income tax piece when they receive it so it can be correctly accounted for on your tax return? eg: On a W-2 there are boxes that show how much you have paid in SS / Medicare.

any links on self employment gratefully appreciated, apart from the IRS ones, I have those. I also note in the IRS guide that you can pay a penalty for miscalculating the estimates even if you end up having made an overpayment in tax when you file your return. So presumably if you don't give enough you get penalized and if you give too much you could get penalized.

Michael

Everything is paid together on form "1040-ES" and when you file "Schedule SE" with your tax return, that determine how much "Self Employment" tax has been paid.

Schedule SE

Noorah101

Regarding the penalization, my husband is self-employed. He never pays the quarterly payments. At the end of the year, his penalization amount is only a few dollars.

Rene

durham_lad

When my wife was self employed I used TurboTax to estimate our combined taxes including her FICA and sent in quarterly estimates for the combined amount. I then used Turbotax to do our return, again only one payment required for the tax due, I didn't need to send in different payments for FICA, Medicare and income tax.

We've been retired for the past 6 years and the income from investments is much more difficult to estimate than when we were working so I sometimes get the estimated tax payments wrong but I've only ever received a penalty once, when I paid too little. I've also got it wrong and paid way too much but they never penalized me for that. (The penalty wasn't much anyway).

Yorkieabroad

If you make your estimated payments via EFTPS there is a page that gives you an option to apportion the payment to FICA, Medicare etc. It is optional...it doesn't actually affect the payment at all. Presumably it just keeps a running tally as the year goes on so you can pull off a report at tax time? I don't know as I have never used that screen, although I do all our payroll deposit payments via EFTPS

robin1234

I think the concept of the IRS penalizing you, even if at the end of the year you have overpaid, is to do with the timing of the tax liability versus when in the year you made estimated payments. So if you underpay in the early months, but more than make it up later, you can still owe a penalty.

celticgrid

I'm afraid you lost me on this one.

This is the first year we've had to deal with this (quarterly payments of estimated tax due on self employed income) and I think I'm getting it about right.

But...

How does the IRS know about any "timing of the tax liability"? Surely income is reported on an annual basis, not in dribs and drabs through the year? If the latter, I'm dreading the tax filing process coming up! Any tips you can give about the situation you describe would be helpful, thanks.

Yorkieabroad

We make estimated deposits for 2 things:-

1) Payroll - we have to make the deposits at a certain time relative to the payroll date, and those are all declared on the Quarterly return. I guess the IRS dont know whether we are making them on time unless they actually audit us. Which they did a few years ago! I had a few sleepless nights leading up to it, but we got a totally clear audit, so hopefully that's us off the radar for a while.

2) Income where tax isn't withheld - mainly rentals and a few overseas sourced things. Again, its up to us to calculate the estimated liability, and pay on time. If we didn't, I don't think the IRS would find out without an audit, but if we declared all of our rental income as coming in December, and deposited accordingly, I suspect that may raise a flag...

The only time I think we've had a penalty was one year when I miscalculated the gain on an asset disposal. We got a penalty on that, even though we also got a reasonably large refund the same year. The penalty was at the "annoying to get" end of the spectrum, rather than the "which kid shall we sell" end....

celticgrid

Thanks. That helps. I was missing the audit option...in the circumstances of an individual reporting self-employed income and paying estimated tax quarterly the only way the IRS could get an idea of whether the amount of tax paid through the year was roughly proportionate to the timing of the income would be if an audit was carried out. So, I'm comfortable with the way we are doing it. Or as comfortable as you can be given it is dealing with the ridiculously complex tax system.

Yorkieabroad

I think so, but bear in mind you (presumably) will be filing quarterly 941's which will break down each months liability and payment/deposit schedule.

celticgrid

Not me, as it happens, but my wife. I'm the salary-slave bringing in the regular income!

Michael

I don't think you have much to worry about unless your estimated payment for the forth quarter is significantly larger than the other quarters. That's likely a red flag to the IRS computer and it likely kicks the return to an IRS auditor to see if that makes sense. However that could happen if someone has large capital gains or exercise stock options in the forth quarter or a large amount of self employment income occurs during the forth quarter.

Unless you are playing with IRS and paying estimated taxes mostly during the final quarter, it's highly unlikely that the computer will kick out the return for a manual audit by an agent to try to determine if that may be legitimate. As long as you put in an effort to try to reflect taxes owed during a quarter, you likely won't have any problems with the IRS. The IRS computer looks for possible "red flags" and if the "red flag" is large does it normally kick the return out out for a manual audit by an agent.

durham_lad

When we sold our rental house we had a large capital gain, and the date of sale is recorded on the tax return so it was important that we made an extra large quarterly estimated payment close to the time of the sale to cover the capital gain tax.

Yorkieabroad

I normally pay ourselves a "living wage" through the year, and accumulate the rest in the company, paying sufficient out as a bonus at the end of the year to ensure we run down the cash in the company by year end. So normally our fourth quarter payroll is quite a bit larger than the other 3, but it's accuratley reflected in the 941, backed up with bank accounts, and easily defendable in the event of (another) audit. Interestingly, the year we got the audit was a year that my wife took a lot of time off, and we didn't have much of a blip in 4Q. Not sure what it was that triggered us that year....maybe just lucky

robin1234

If I'm getting a refund, why would I owe an underpayment penalty?

See the above help page from HR Block. There's probably something more authoritative from the IRS themselves....
Quote from the above link;

"The IRS calculates underpayment penalties separately for each of the four periods of the year. This means you can end up owing a penalty for an earlier payment period even if you paid enough later in the year to make up for it."