Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

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neb2020
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Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by neb2020 »

Regular W-2 income employee here.

I'm trying something new this year, where I reduce my tax withholding to zero. Planning to make quarterly estimated taxes. However, most of the material out there seems to be for self-employed. Any best practices for W-2 employees?

My plan is to use Turbotax Taxcaster to estimate the taxes I need to pay in 2021. I know it technically will give numbers based on 2020 tax rates, but it's going to be minor differences. So, I'll estimate my W-2 income for 2021, enter $0 taxes withheld, get the amount of taxes owed and divide it by 4. Then pay that amount every quarter.

Is that sufficient?

------------------------------------------------------------------------------------------------------------------------------------------
And in case anyone is wondering, I'm doing this to increase my credit card spend for signup offers. Taxes are now my largest expense and it makes no sense not to charge it on a card!
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eye.surgeon
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by eye.surgeon »

Estimated payments are meant for non W2 employees with untaxed income. What's the point. Seems like moderate work for no return.
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neb2020
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by neb2020 »

eye.surgeon wrote: Wed Jan 13, 2021 2:24 am Estimated payments are meant for non W2 employees with untaxed income. What's the point. Seems like moderate work for no return.
That's nothing illegal about this. I checked. Unless you have a source that indicates otherwise?
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Eagle33
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by Eagle33 »

neb2020 wrote: Wed Jan 13, 2021 2:26 am
eye.surgeon wrote: Wed Jan 13, 2021 2:24 am Estimated payments are meant for non W2 employees with untaxed income. What's the point. Seems like moderate work for no return.
That's nothing illegal about this. I checked. Unless you have a source that indicates otherwise?
Do you have no tax liability in 2020 & 2021?
From Form W-4 General Instructions
Exemption from withholding. You may claim exemption from withholding for 2021 if you meet both of the following conditions: you had no federal income tax liability in 2020 and you expect to have no federal income tax liability in 2021. You had no federal income tax liability in 2020 if (1) your total tax on line 24 on your 2020 Form 1040 or 1040-SR is zero (or less than the sum of lines 27, 28, 29, and 30), or (2) you were not required to file a return because your income was below the filing threshold for your correct filing status. If you claim exemption, you will have no income tax withheld from your paycheck and may owe taxes and penalties when you file your 2021 tax return.
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MarkNYC
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by MarkNYC »

neb2020 wrote: Wed Jan 13, 2021 2:26 am
eye.surgeon wrote: Wed Jan 13, 2021 2:24 am Estimated payments are meant for non W2 employees with untaxed income. What's the point. Seems like moderate work for no return.
That's nothing illegal about this. I checked. Unless you have a source that indicates otherwise?
Code Section 3402 requires federal tax withholding on wages, unless the employee qualifies for an exemption as posted above by Eagle33.
sailaway
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by sailaway »

Why has this question been asked so many times recently? Is there some new youtube vid out there proclaiming this as a way to save something?
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Nate79
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by Nate79 »

Maybe you should actually read what you are signing on the W4.
solar99999
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by solar99999 »

neb2020 wrote: Wed Jan 13, 2021 2:21 am Regular W-2 income employee here.

I'm trying something new this year, where I reduce my tax withholding to zero. Planning to make quarterly estimated taxes. However, most of the material out there seems to be for self-employed. Any best practices for W-2 employees?

My plan is to use Turbotax Taxcaster to estimate the taxes I need to pay in 2021. I know it technically will give numbers based on 2020 tax rates, but it's going to be minor differences. So, I'll estimate my W-2 income for 2021, enter $0 taxes withheld, get the amount of taxes owed and divide it by 4. Then pay that amount every quarter.

Is that sufficient?

------------------------------------------------------------------------------------------------------------------------------------------
And in case anyone is wondering, I'm doing this to increase my credit card spend for signup offers. Taxes are now my largest expense and it makes no sense not to charge it on a card!
I think your method is sound.

I practice what you preach at a more moderate scale. Instead of reducing our withholdings to zero, I reduced it to approximately 40% of what it should be.

Why? Because my boss is nosy when he shouldn't be and it's easier to explain a 60% reduction than a 40%.

I'm a CPA by profession so I have a good sense of my tax situation throughout the year to avoid underpayment penalty.
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Hyperchicken
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by Hyperchicken »

I understand how but I don't understand why.
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neb2020
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by neb2020 »

Eagle33 wrote: Wed Jan 13, 2021 7:14 pm
neb2020 wrote: Wed Jan 13, 2021 2:26 am
eye.surgeon wrote: Wed Jan 13, 2021 2:24 am Estimated payments are meant for non W2 employees with untaxed income. What's the point. Seems like moderate work for no return.
That's nothing illegal about this. I checked. Unless you have a source that indicates otherwise?
Do you have no tax liability in 2020 & 2021?
From Form W-4 General Instructions
Exemption from withholding. You may claim exemption from withholding for 2021 if you meet both of the following conditions: you had no federal income tax liability in 2020 and you expect to have no federal income tax liability in 2021. You had no federal income tax liability in 2020 if (1) your total tax on line 24 on your 2020 Form 1040 or 1040-SR is zero (or less than the sum of lines 27, 28, 29, and 30), or (2) you were not required to file a return because your income was below the filing threshold for your correct filing status. If you claim exemption, you will have no income tax withheld from your paycheck and may owe taxes and penalties when you file your 2021 tax return.
No, I claim a deduction that is equal to my expected W-2 income to get zero withholding.
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neb2020
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by neb2020 »

Hyperchicken wrote: Wed Jan 13, 2021 9:09 pm I understand how but I don't understand why.
It's explained in the first post. Taxes are basically my #1 expense now, and if you don't do paycheck withholding, you can charge up large expenses on your credit card by paying taxes. Use those large expenses to qualify for sign bonuses, spend bonuses, etc. It's a 2% surcharge and for my case it does make sense, as I get more in return.
MarkNYC
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by MarkNYC »

neb2020 wrote: Thu Jan 14, 2021 4:59 am
Eagle33 wrote: Wed Jan 13, 2021 7:14 pm
neb2020 wrote: Wed Jan 13, 2021 2:26 am
eye.surgeon wrote: Wed Jan 13, 2021 2:24 am Estimated payments are meant for non W2 employees with untaxed income. What's the point. Seems like moderate work for no return.
That's nothing illegal about this. I checked. Unless you have a source that indicates otherwise?
Do you have no tax liability in 2020 & 2021?
From Form W-4 General Instructions
Exemption from withholding. You may claim exemption from withholding for 2021 if you meet both of the following conditions: you had no federal income tax liability in 2020 and you expect to have no federal income tax liability in 2021. You had no federal income tax liability in 2020 if (1) your total tax on line 24 on your 2020 Form 1040 or 1040-SR is zero (or less than the sum of lines 27, 28, 29, and 30), or (2) you were not required to file a return because your income was below the filing threshold for your correct filing status. If you claim exemption, you will have no income tax withheld from your paycheck and may owe taxes and penalties when you file your 2021 tax return.
No, I claim a deduction that is equal to my expected W-2 income to get zero withholding.
So, you plan to submit to your employer a Form W-4 where you list an "expected deduction" that is large enough to reduce your withholding to zero, knowing that the expected deduction you list is fictitious? Are you aware that you must sign the W-4 under penalty of perjury, stating that to the best of your knowledge and belief the form is "true, correct, and complete"?
MarkNYC
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by MarkNYC »

solar99999 wrote: Wed Jan 13, 2021 8:43 pm
neb2020 wrote: Wed Jan 13, 2021 2:21 am Regular W-2 income employee here.

I'm trying something new this year, where I reduce my tax withholding to zero. Planning to make quarterly estimated taxes. However, most of the material out there seems to be for self-employed. Any best practices for W-2 employees?

My plan is to use Turbotax Taxcaster to estimate the taxes I need to pay in 2021. I know it technically will give numbers based on 2020 tax rates, but it's going to be minor differences. So, I'll estimate my W-2 income for 2021, enter $0 taxes withheld, get the amount of taxes owed and divide it by 4. Then pay that amount every quarter.

Is that sufficient?

------------------------------------------------------------------------------------------------------------------------------------------
And in case anyone is wondering, I'm doing this to increase my credit card spend for signup offers. Taxes are now my largest expense and it makes no sense not to charge it on a card!
I think your method is sound.

I practice what you preach at a more moderate scale. Instead of reducing our withholdings to zero, I reduced it to approximately 40% of what it should be.

Why? Because my boss is nosy when he shouldn't be and it's easier to explain a 60% reduction than a 40%.

I'm a CPA by profession so I have a good sense of my tax situation throughout the year to avoid underpayment penalty.
Perhaps I am misunderstanding. I see two ways the OP can reduce withholding on his wages to zero. The first is to submit a Form W-4 where he claims "EXEMPT" from withholding, knowing that is does not qualify to be exempt. The second is to list on the W-4 an "expected deduction" that is large enough to reduce his withholding to zero, even though he knows he has no such large expected deduction. The W-4 must be signed under penalty of perjury, stating the belief that the form is "true, correct and complete."

Could you explain why you believe that either method of reducing the OP's withholding to zero is appropriate, or are you thinking of some other method?
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neb2020
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by neb2020 »

MarkNYC wrote: Thu Jan 14, 2021 9:25 am
So, you plan to submit to your employer a Form W-4 where you list an "expected deduction" that is large enough to reduce your withholding to zero, knowing that the expected deduction you list is fictitious? Are you aware that you must sign the W-4 under penalty of perjury, stating that to the best of your knowledge and belief the form is "true, correct, and complete"?
Yes, it's an "expected deduction". So that is "true, correct and complete". The keyword is expected. It's not "actual deduction".
MarkNYC
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by MarkNYC »

neb2020 wrote: Thu Jan 14, 2021 1:03 pm
MarkNYC wrote: Thu Jan 14, 2021 9:25 am
So, you plan to submit to your employer a Form W-4 where you list an "expected deduction" that is large enough to reduce your withholding to zero, knowing that the expected deduction you list is fictitious? Are you aware that you must sign the W-4 under penalty of perjury, stating that to the best of your knowledge and belief the form is "true, correct, and complete"?
Yes, it's an "expected deduction". So that is "true, correct and complete". The keyword is expected. It's not "actual deduction".
The fact that you plan to replace your tax withholding with quarterly estimated tax payments is clear evidence that you do not really expect to have deductions large enough to reduce your federal income tax to zero. Do whatever you want, but it is foolish to believe that what you plan to do is proper.
oktax
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by oktax »

You should look at the IRS guidance on “lock in letters.” Even if you’re not claiming exempt from withholding, if you list more deductions than you’re actually allowed, you can expect the IRS to eventually catch up and tell your employer to withhold at higher levels.
solar99999
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by solar99999 »

MarkNYC wrote: Thu Jan 14, 2021 9:52 am
solar99999 wrote: Wed Jan 13, 2021 8:43 pm
neb2020 wrote: Wed Jan 13, 2021 2:21 am Regular W-2 income employee here.

I'm trying something new this year, where I reduce my tax withholding to zero. Planning to make quarterly estimated taxes. However, most of the material out there seems to be for self-employed. Any best practices for W-2 employees?

My plan is to use Turbotax Taxcaster to estimate the taxes I need to pay in 2021. I know it technically will give numbers based on 2020 tax rates, but it's going to be minor differences. So, I'll estimate my W-2 income for 2021, enter $0 taxes withheld, get the amount of taxes owed and divide it by 4. Then pay that amount every quarter.

Is that sufficient?

------------------------------------------------------------------------------------------------------------------------------------------
And in case anyone is wondering, I'm doing this to increase my credit card spend for signup offers. Taxes are now my largest expense and it makes no sense not to charge it on a card!
I think your method is sound.

I practice what you preach at a more moderate scale. Instead of reducing our withholdings to zero, I reduced it to approximately 40% of what it should be.

Why? Because my boss is nosy when he shouldn't be and it's easier to explain a 60% reduction than a 40%.

I'm a CPA by profession so I have a good sense of my tax situation throughout the year to avoid underpayment penalty.
Perhaps I am misunderstanding. I see two ways the OP can reduce withholding on his wages to zero. The first is to submit a Form W-4 where he claims "EXEMPT" from withholding, knowing that is does not qualify to be exempt. The second is to list on the W-4 an "expected deduction" that is large enough to reduce his withholding to zero, even though he knows he has no such large expected deduction. The W-4 must be signed under penalty of perjury, stating the belief that the form is "true, correct and complete."

Could you explain why you believe that either method of reducing the OP's withholding to zero is appropriate, or are you thinking of some other method?
Hello,

The instructions to W-4 states that "Your privacy. If you prefer to limit information provided in Steps 2 through 4, use the online estimator, which will also increase accuracy."

You can then go to www.irs.gov/W4App and go through a series of questions that will at the end provide you with a pre-filled W-4 you can provide your employer. Note that this method overrides the normal instructions to the W-4 since the normal way results in you making disclosures, such as number of dependents, income from other jobs, etc, to your employer that are not required by law.

The key field in the W4App is part 2, "Other Sources of Income and Tax Payment". It states "Other Federal Taxes Paid:

This could include any prior-year tax refund applied towards this year’s tax obligation, estimated tax payments, backup withholding, or additional federal income tax withholding from dividends, interest, annuities, or a distribution from an IRA (not Roth IRAs), 401(k) or a trust. This does not include withholding from wages, pension, self-employment income, unemployment compensation or social security income."

So if you estimate your annual tax liability to be $10,000 for the year, enter $10,000 and complete the rest of the form. You'll be able to generate a W-4 with just a number on Line 3 and that would reduce most, if not all, of your withholding.

Make sure you save a copy of the final page of the W4App to support your withholding reduction claim to IRS in the event of an inquiry. From my experience, the IRS is unlikely to initiate an inquiry unless you made a mathematical error and had to pay an underpayment penalty.

To provide a real example, I "prepay" 60% of my tax liability claimed as a withholding reduction as a prior year extension payment on April 15th so that it becomes a prior year tax obligation and apply it to my current year's taxes. I do this because my bonus is paid out early in the year. Also part of the reason I can't fully reduce my withholdings to zero is because I don't know what my bonus is each year and thus there is always withholding on it. I like having one less thing to worry about for the rest of the year although one may prefer not giving the government an interest-free loan.

While OP may or may noy have his/her taxes paid in early, I would imagine with correct execution, he/she would not be subject to underpayment penalty either way. If the IRS inquires, a letter explaining that estimated taxes were made in lieu of withholding and that they were sufficient to cover all tax liabilities should satisfy as having a reasonable basis for withholding reduction.

Hope this helps!
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Texanbybirth
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Re: Best Practices for Paying Quarterly Estimated Taxes for W-2 Employee with No Withholding

Post by Texanbybirth »

I’ve had $0 fed w/h on my paychecks for a few years now. We never owe taxes at EOY, and usually get a small refund from me overestimating estimated tax payments.

The more difficult piece is my bonus income. I’ve had to fight hard to get my payroll dept to w/h less than 22% (used to be 20%) on my bonus payroll run. It always resulted in us getting a large refund the next Feb upon filing taxes. Thankfully the last two years have worked okay, but I’m about to face it again in a couple weeks.

I don’t advocate you being deceitful on your forms, though.
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