Quarterly Taxes Approach

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Topic Author
3funds4life
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Joined: Thu Sep 24, 2020 11:48 pm

Quarterly Taxes Approach

Post by 3funds4life »

So this is my first year that I think I will need to pay quarterly taxes and I'm trying to figure out from a planning perspective what the best way to do this will be:
Some stats:
2021 EFFECTIVE Federal tax rate is approximately 33% including SS/Medicare
2021 EFFECTIVE State tax rate is approx. 7%.

I receive a W2 salary for about 30% of my income and then throughout the year the rest is paid out as a combination of payroll bonuses and S-corp distributions (the payroll bonus and distributions can vary significantly throughout the year)

The two methods I was thinking are:
1) Multiply my 2021 Federal tax by 110% to stay in the safe harbor (plus a little more so that I'm not cutting it too close) and pay 25% of that quarterly but keep track of what I will owe when I file my 2022 taxes and keep that in a side account
2) Keep track of my gross income for the quarter and pay 33% of it as a federal quarterly payment and 7% of it a state quarterly payment

Also my W2 salary ends up having like 10% federal withheld - I'd also increase that to match the 33% effective rate

If there's another good way I'd love to hear it!
Gill
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Re: Quarterly Taxes Approach

Post by Gill »

I like #1. With #2 I suspect you might be paying in too much. Are you sure your effective rate is a combined 40%?
Gill
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Topic Author
3funds4life
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Re: Quarterly Taxes Approach

Post by 3funds4life »

It would be great if it wasn't but when I put into a Paycheck calculator (including my 401k deductions) it shows as 40%
jebmke
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Re: Quarterly Taxes Approach

Post by jebmke »

#1 -- and you don't have to worry about cutting it too close unless you don't think you will know your 2021 Tax Liability by the first due date.

I do the safe harbor and then evaluate things in December and adjust Q4 if I think I am significantly overpaid. I prefer to be underpaid, even if it means a small penalty + interest.

I set aside the 4 quarter amount in my AMEX savings account and push each payment to my checking account a couple of days before the IRS snatches it out with EFTPS. No fuss, no muss. I've never had the IRS miss a debit date in over a decade of using EFTPS.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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Lee_WSP
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Re: Quarterly Taxes Approach

Post by Lee_WSP »

#1 is the easiest IMO. You can subtract what is withheld from your paycheck each quarter from that amount and arrive at the 110% total next year.
newacct
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Re: Quarterly Taxes Approach

Post by newacct »

Aren't payroll bonuses still W-2 income and have taxes withheld? How much of your total income is W-2 income? If it is most of it, then it should be feasible to increase withholding to reach the safe harbor level, so you wouldn't need to make estimated tax payments. And this way you can even increase withholding later in the year to reach the required level if you realize you've withheld too little earlier in the year.
shess
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Re: Quarterly Taxes Approach

Post by shess »

3funds4life wrote: Thu Jan 13, 2022 12:36 pm The two methods I was thinking are:
1) Multiply my 2021 Federal tax by 110% to stay in the safe harbor (plus a little more so that I'm not cutting it too close) and pay 25% of that quarterly but keep track of what I will owe when I file my 2022 taxes and keep that in a side account
2) Keep track of my gross income for the quarter and pay 33% of it as a federal quarterly payment and 7% of it a state quarterly payment
In general, #1 is a lot easier, it only really fails if your income is REALLY variable. Like one year my (1099) income was three checks of about equal size, one in May, two in October. And since none of them were certain, I went pay-as-you-go out of simple necessity, as I couldn't afford to lend the government tens of thousands of dollars on the off chance I'd get paid.

My usual approach over the years has been to make my 4/15 estimated payment using the assumptions based on the previous year's info, even if I didn't actually realize any income in Q1 above dividends (which are somewhat reliable). Then I'll do a pencil plan before the 6/15 payment. Usually by that point I have some additional insight into whether I'll catch up to the expected income, or if I can expect the dry spell to continue to the next year. Sometimes I'd just make the scheduled 6/15 payment anyhow, if I had the cash and didn't have insight into the future. Then repeat the same thing at 9/15, usually with more certainty.

If I had skipped a 1040ES payment, then if at any point in the next quarter I suddenly had a big income event, I'd immediately send the missed payment off rather than waiting until the next date. Keep in mind that the underpayment is charged at %.5/month of underpayment (actually I think it's calculated by the day underpaid). So if/when you actually realize the income, sending off the payment stops the bleeding. As long as you can show that you really did receive the income in variable fashion, I don't think there's much likelihood you'd get anything more severe than the %.5 penalty.
MarkNYC
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Re: Quarterly Taxes Approach

Post by MarkNYC »

Using 100/110% of prior year tax is always easier, but it is not always practical. It is not practical when the prior year income was unusually high due to a one-time event and the current year is almost certain to be much lower. Also impractical for many high-income taxpayers whose income is mostly other than from a W-2 and can fluctuate significantly from year to year.

In those situations, 90% of current year tax becomes the target, and calculating proper quarterly payments can vary from reasonably easy to very difficult, depending on the nature, variety, and predictability of the taxpayer's income.
Last edited by MarkNYC on Thu Jan 13, 2022 4:57 pm, edited 1 time in total.
Topic Author
3funds4life
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Re: Quarterly Taxes Approach

Post by 3funds4life »

Thanks all! At this point since this is a relatively new position for me I'll probably stick with the 110% as long as I have the cash.

So my W2 salary is probably about 30% of my income. How much is paid out each quarter as a distribution vs. payroll bonus depends on what my income was relative to the other shareholders so that the distribution amounts match our shareholder percentages. Yes payroll bonuses do have taxes withheld so I would just subtract the taxes withheld from my salary and payroll bonuses from whatever my quarterly payment would be
newacct
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Re: Quarterly Taxes Approach

Post by newacct »

No but I'm saying that you can try to increase your withholding (from salary and bonuses; I'm not sure if you can do it for bonuses) to high enough so that it reaches the safe harbor level, and then you wouldn't need estimated tax payments.
jebmke
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Re: Quarterly Taxes Approach

Post by jebmke »

newacct wrote: Thu Jan 13, 2022 5:34 pm No but I'm saying that you can try to increase your withholding (from salary and bonuses; I'm not sure if you can do it for bonuses) to high enough so that it reaches the safe harbor level, and then you wouldn't need estimated tax payments.
you can for bonuses. I used to get the amount of my bonus every year in early December after the board approved it and then tell the payroll department the amount I wanted withheld when it was paid.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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