Estimated Tax when switching to 1099 income mid-year

[marklar13]

I switched from W2 employment to Sole Proprietorship earlier this month. I have done some pretty detailed tax forecasting with my own spreadsheets, and I know (with reasonable accuracy) what my total estimated tax payment is going to be.

Since I didn't have self employment income in Q1 or Q2, obviously I haven't made any estimated tax payments yet (just the normal W2 withholding up until 2 weeks ago). I've skimmed through the IRS forms for estimated tax, and it seems that at the end of the year, I am going to need to fill out form 2210, Schedule AI to indicate that I received my self employment income unevenly through the year.

This is fine... but that table looks like a nightmare to fill out. I will get around to it eventually (or maybe my tax software will ease the burden)... but by question is, for now can I just make my estimated tax payment based on a simple prorated amount of the totals I have calculated? That is...

• I'm reasonably confident that our total tax shortfall at the end of the year (considering all income sources, deductions, withholdings, etc) is $X
• I know how much 1099 income I will make in Q3, and how much I am expected to make in Q4.
• For my estimated tax payment for Q3 can I just make a payment of $X * (Q3 1099 income) / (Total expected 1099 income)?

Next year will be much easier because I can just do this calculation at the beginning of the year and then make my payments in equal installments. Since that ship has sailed, I am hoping I can just do this prorated amount based on when I started receiving 1099 income.

As always, thanks for all the help.

[FiveK]

If your W-2 withholding matched the tax liability your accrued from all income while a W-2 employee, then you just need to have upcoming quarterly estimated tax payments match the tax liability that accrues in Q3 and Q4. Your algorithm will probably work. To be perfectly accurate you'd need to account for the difference in tax rates among ordinary, self-employment, and LTCG/QD income, but if you aim for $0 tax due at filing you will likely have paid at least the 90% required to avoid penalty.

Yes, tax software eases (but does not eliminate) filling Schedule AI.

[marklar13]

Edit: I misread your point about withholding on my first pass through here. Yes -- the W-2 withholding roughly matches what we would owe. In general I shoot for a $0 tax bill at the end of the year.

As you noted, I plan to just use my full estimate rather than 90% to play it safe this year. I'm pretty confident in the calculations, but it's not a big deal to overshoot it by a bit... especially since it is my first year doing it.

I'm pretty sure the prorated formula will get me pretty close because my payments are expected to be hourly work with 40 hours a week (minus holidays and vacation) through the end of the year. That being said, I'm just trying to double check that I'm not missing something big in that complicated table on the tax form.

[Eagle33]

Taxes for the self-employed includes both income taxs and payroll taxes (both employer & employee sides).