Avoid Penalty Tax?

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socialforums2019
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Avoid Penalty Tax?

Post by socialforums2019 »

I have a commission based job which makes forecasting my tax liability a pain/impossible. The commission payments hit my W2 so taxes are withdrawn. With that said, I want to make sure I don't get any kind of underpayment tax penalties. In reading the IRS website it states:
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
So as an example case, if prior year tax return, I paid say $50K/$100K, as long as I pay $55K/$110K minimum by end of the year, there is no way I can get a underpayment penalty, even if I owe an additional $25K of taxes after that come tax return time?

Obviously, I'm not wanting the $25K additional tax liability come tax return time, so I am paying estimate taxes, but it really is hard to project as I don't want to overpay.
increment
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Re: Avoid Penalty Tax?

Post by increment »

socialforums2019 wrote: Tue Sep 14, 2021 7:28 am So as an example case, if prior year tax return, I paid say $50K/$100K, as long as I pay $55K/$110K minimum by end of the year, there is no way I can get a underpayment penalty
To avoid any penalty at all, "by end of the year" is not good enough. You need to pay 25% (or more) of whatever the estimated-tax requirement turns out to be, by each of the four deadlines throughout the tax year. In practice, I suppose you will have to guess what the estimated-tax requirement will be, because you don't know how much will be withheld later in the year.
exodusNH
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Re: Avoid Penalty Tax?

Post by exodusNH »

socialforums2019 wrote: Tue Sep 14, 2021 7:28 am I have a commission based job which makes forecasting my tax liability a pain/impossible. The commission payments hit my W2 so taxes are withdrawn. With that said, I want to make sure I don't get any kind of underpayment tax penalties. In reading the IRS website it states:
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
So as an example case, if prior year tax return, I paid say $50K/$100K, as long as I pay $55K/$110K minimum by end of the year, there is no way I can get a underpayment penalty, even if I owe an additional $25K of taxes after that come tax return time?

Obviously, I'm not wanting the $25K additional tax liability come tax return time, so I am paying estimate taxes, but it really is hard to project as I don't want to overpay.
If everything is coming in on W2 and this is your only job, your employer should be able to figure the taxes appropriately as long as you haven't done something like claim 10 dependents.

https://www.investopedia.com/ask/answer ... ntaxes.asp
Topic Author
socialforums2019
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Re: Avoid Penalty Tax?

Post by socialforums2019 »

exodusNH wrote: Tue Sep 14, 2021 8:10 am
socialforums2019 wrote: Tue Sep 14, 2021 7:28 am I have a commission based job which makes forecasting my tax liability a pain/impossible. The commission payments hit my W2 so taxes are withdrawn. With that said, I want to make sure I don't get any kind of underpayment tax penalties. In reading the IRS website it states:
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
So as an example case, if prior year tax return, I paid say $50K/$100K, as long as I pay $55K/$110K minimum by end of the year, there is no way I can get a underpayment penalty, even if I owe an additional $25K of taxes after that come tax return time?

Obviously, I'm not wanting the $25K additional tax liability come tax return time, so I am paying estimate taxes, but it really is hard to project as I don't want to overpay.
If everything is coming in on W2 and this is your only job, your employer should be able to figure the taxes appropriately as long as you haven't done something like claim 10 dependents.

https://www.investopedia.com/ask/answer ... ntaxes.asp
Taking a look back at my prior commission checks, it looks like they withhold 28% of the gross amount for federal.
niagara_guy
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Re: Avoid Penalty Tax?

Post by niagara_guy »

It looks like your only income is from your employer as a w-2 employee. My understanding is that any money withheld any time within the year is treated the same, so you could estimate your 2021 taxes now and change your withholdings now so you have withheld approximately what your 2021 tax (don't forget to do federal and state) will be. Google “safe harbor tax rule” for more information, which you may need to know if you can't predict your income for the remainder of 2021.
tibbitts
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Re: Avoid Penalty Tax?

Post by tibbitts »

niagara_guy wrote: Wed Sep 15, 2021 10:02 am It looks like your only income is from your employer as a w-2 employee. My understanding is that any money withheld any time within the year is treated the same, so you could estimate your 2021 taxes now and change your withholdings now so you have withheld approximately what your 2021 tax (don't forget to do federal and state) will be. Google “safe harbor tax rule” for more information, which you may need to know if you can't predict your income for the remainder of 2021.
Except if the income is lumpy and unpredictable enough it might not be possible to course-correct late in a year, or certainly to predict in time to change withholding. It seems like estimated payments are best for adjusting if necessary, done quarterly, to make sure enough has been paid for that quarter (well, not really quarters... IRS "quarters" I guess.) What the employer will withhold is probably based on whether there is a salary plus commission or just commission, but if it turns out that every paycheck essentially assumes the income for that paycheck is annualized, that may or may not result in the correct total tax being withheld.
FactualFran
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Re: Avoid Penalty Tax?

Post by FactualFran »

socialforums2019 wrote: Tue Sep 14, 2021 7:28 am So as an example case, if prior year tax return, I paid say $50K/$100K, as long as I pay $55K/$110K minimum by end of the year, there is no way I can get a underpayment penalty, even if I owe an additional $25K of taxes after that come tax return time?
The word "paid" could give the wrong impression. It is possible to pay income taxes by withholding and by making estimates payments.

In this case, if $50K/$100K is withheld, then there would be no underpayment penalty. Because of the additional $25K in income tax for a year, an additional amount would need to be withheld the following year to avoid underpayment penalty based on the amount withheld.

More generally, in this case, if $50K/$100K is paid by a combination of withholding and timely estimated tax payments, then there would be no underpayment penalty. There might be a penalty if the estimated tax payments are not timely.

For those whose income varied during the year, an underpayment penalty can be reduced or eliminated by including with the income tax return Form 2210 with its Schedule AI (Annualized Income Installment Method) part of completed. Completing it can be time consuming.

[Edit: corrected grammar]
Last edited by FactualFran on Wed Sep 15, 2021 12:08 pm, edited 2 times in total.
Mike Scott
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Re: Avoid Penalty Tax?

Post by Mike Scott »

With unpredictible income, the safest way to hit the safe harbor is based on the prior year tax amount because you know exactly what that number was. Are you on track to having paid 100% (or 110%) of that amount? If your withholding is on track, there is nothing to do unless you want or need to pay some estimated taxes now. Check your state taxes as well if you have state income tax.
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cchrissyy
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Re: Avoid Penalty Tax?

Post by cchrissyy »

if you are in the safe harbor thanks to withholding or quarterly payments which are more than enough when compared to last year's tax liability, then there is no amount of extra income this year which would make you have a penalty.

if you have tax software you can see this for yourself. put in true information for the prior year and for this year's withholding to be more than last year's tax. then, put in various numbers extra income with no extra withholding, and your tax bill will go up but still zero penalty or interest because you are in the safe harbor. you can put a million dollars and it's still true.
tashnewbie
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Re: Avoid Penalty Tax?

Post by tashnewbie »

Mike Scott wrote: Wed Sep 15, 2021 11:46 am With unpredictible income, the safest way to hit the safe harbor is based on the prior year tax amount because you know exactly what that number was. Are you on track to having paid 100% (or 110%) of that amount? If your withholding is on track, there is nothing to do unless you want or need to pay some estimated taxes now. Check your state taxes as well if you have state income tax.
+1. If your 2020 AGI was > $150k, then you need to pay 110% of 2020 tax to be in the safe harbor.
newacct
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Re: Avoid Penalty Tax?

Post by newacct »

For withholding, it is true that as long as your withholding alone (not including estimated tax payments) reaches the safe harbor level by the last day of the year, you will have no underpayment penalty. So even if you didn't pay enough estimated taxes and/or didn't withhold enough in earlier quarters, you can still increase withholding later in the year to make up for it, as long as the withholding alone can reach the safe harbor level by the last day of the year.

For estimated taxes, it is not true. If withholding alone does not reach the safe harbor level, then enough estimated taxes (calculated by one of two methods) needs to be paid by each quarter's deadline in order to avoid underpayment penalties. Making up earlier quarters' payments in later quarters does not avoid a penalty.
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cchrissyy
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Re: Avoid Penalty Tax?

Post by cchrissyy »

the post above me is true and important to know - but also - the penalty, if you have one, is measuring the diference between what you actually paid by a particular date and what you should have paid to reach a safe harbor. so this number grows as your income grows but it stops growing with whatever figure would have been the safe harbor.
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socialforums2019
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Re: Avoid Penalty Tax?

Post by socialforums2019 »

So I may have an issue then. I received a significant 6 figure commission payout in January. While that commission payout goes through the W2 and my company withheld taxes, my estimate tax payments on April 15 and June 15 was only $3K for federal and then just yesterday I noticed my estimated taxes owed was going to be significant and so I did a $10K estimate tax payment. Even if by looking at it from the whole year, I'm still going to get a penalty potentially for my Q1 underpayment because I had a large payout in Q1?
tashnewbie
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Re: Avoid Penalty Tax?

Post by tashnewbie »

socialforums2019 wrote: Thu Sep 16, 2021 6:26 am So I may have an issue then. I received a significant 6 figure commission payout in January. While that commission payout goes through the W2 and my company withheld taxes, my estimate tax payments on April 15 and June 15 was only $3K for federal and then just yesterday I noticed my estimated taxes owed was going to be significant and so I did a $10K estimate tax payment. Even if by looking at it from the whole year, I'm still going to get a penalty potentially for my Q1 underpayment because I had a large payout in Q1?
Are your 2021 withholdings going to be 100% (or 110% if 2020 AGI >$150k) of 2020 tax?
MrJedi
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Re: Avoid Penalty Tax?

Post by MrJedi »

You can increase withholdings for this last quarter of the year. Tax withholdings from a paycheck are always considered timely regardless of the date of each withholding.

This is in contrast to estimated payments which must be paid in the quarter earned or in 4 equal quarters to be considered timely. The quarter earned tax form reporting is also quite a bit more complicated.
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socialforums2019
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Re: Avoid Penalty Tax?

Post by socialforums2019 »

tashnewbie wrote: Thu Sep 16, 2021 7:26 am
socialforums2019 wrote: Thu Sep 16, 2021 6:26 am So I may have an issue then. I received a significant 6 figure commission payout in January. While that commission payout goes through the W2 and my company withheld taxes, my estimate tax payments on April 15 and June 15 was only $3K for federal and then just yesterday I noticed my estimated taxes owed was going to be significant and so I did a $10K estimate tax payment. Even if by looking at it from the whole year, I'm still going to get a penalty potentially for my Q1 underpayment because I had a large payout in Q1?
Are your 2021 withholdings going to be 100% (or 110% if 2020 AGI >$150k) of 2020 tax?
Last year, my Fed tax liability was around $70K. This year, its forecasted to be $130K. To date, I have around $90K withheld with an additional $16K total paid in estimate taxes to date.
tashnewbie
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Re: Avoid Penalty Tax?

Post by tashnewbie »

socialforums2019 wrote: Thu Sep 16, 2021 9:29 am
tashnewbie wrote: Thu Sep 16, 2021 7:26 am
socialforums2019 wrote: Thu Sep 16, 2021 6:26 am So I may have an issue then. I received a significant 6 figure commission payout in January. While that commission payout goes through the W2 and my company withheld taxes, my estimate tax payments on April 15 and June 15 was only $3K for federal and then just yesterday I noticed my estimated taxes owed was going to be significant and so I did a $10K estimate tax payment. Even if by looking at it from the whole year, I'm still going to get a penalty potentially for my Q1 underpayment because I had a large payout in Q1?
Are your 2021 withholdings going to be 100% (or 110% if 2020 AGI >$150k) of 2020 tax?
Last year, my Fed tax liability was around $70K. This year, its forecasted to be $130K. To date, I have around $90K withheld with an additional $16K total paid in estimate taxes to date.
Then you're within the safe harbor and won't owe any underpayment penalty.

Your 2021 withholding needs to be $70k (100% of 2020 tax) or $77k (110%), to avoid the underpayment penalty. You're already in the safe harbor either way.

You may owe taxes when you file your tax return, but you won't owe a penalty. If you don't want to owe much when you file your return, you'll need to make sufficient estimated tax payments through the rest of this year or adjust your W-4 withholdings (may be easier to do the latter).
FactualFran
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Re: Avoid Penalty Tax?

Post by FactualFran »

socialforums2019 wrote: Thu Sep 16, 2021 6:26 am So I may have an issue then. I received a significant 6 figure commission payout in January. While that commission payout goes through the W2 and my company withheld taxes, my estimate tax payments on April 15 and June 15 was only $3K for federal and then just yesterday I noticed my estimated taxes owed was going to be significant and so I did a $10K estimate tax payment. Even if by looking at it from the whole year, I'm still going to get a penalty potentially for my Q1 underpayment because I had a large payout in Q1?
There could be an underpayment penalty for Q1, and possibly some later quarters, if you file Form 2210 with its Schedule AI (Annualized Income Installment Method) part of completed. That Schedule calculates the income tax for Q1 as being 1/4 of what the income tax would be for the year if the income occurred at the same rate for the rest of the year.

If you do not complete Schedule AI, then the IRS treats income as being earned at the same rate each quarter. If someone who did not complete Schedule AI and had income only in Q1, then, essentially, the IRS would calculate the income tax for each quarter as being 1/4 of the income tax for the year on the income that was reported as the income for the year.
newacct
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Re: Avoid Penalty Tax?

Post by newacct »

FactualFran wrote: Thu Sep 16, 2021 12:18 pm
socialforums2019 wrote: Thu Sep 16, 2021 6:26 am So I may have an issue then. I received a significant 6 figure commission payout in January. While that commission payout goes through the W2 and my company withheld taxes, my estimate tax payments on April 15 and June 15 was only $3K for federal and then just yesterday I noticed my estimated taxes owed was going to be significant and so I did a $10K estimate tax payment. Even if by looking at it from the whole year, I'm still going to get a penalty potentially for my Q1 underpayment because I had a large payout in Q1?
There could be an underpayment penalty for Q1, and possibly some later quarters, if you file Form 2210 with its Schedule AI (Annualized Income Installment Method) part of completed. That Schedule calculates the income tax for Q1 as being 1/4 of what the income tax would be for the year if the income occurred at the same rate for the rest of the year.

If you do not complete Schedule AI, then the IRS treats income as being earned at the same rate each quarter. If someone who did not complete Schedule AI and had income only in Q1, then, essentially, the IRS would calculate the income tax for each quarter as being 1/4 of the income tax for the year on the income that was reported as the income for the year.
Schedule AI line 24 also considers the amount of tax that would have been required under the non-AI method, and uses the lesser of the two. So you would not be worse off using Schedule AI.
FactualFran
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Re: Avoid Penalty Tax?

Post by FactualFran »

newacct wrote: Thu Sep 16, 2021 8:20 pm Schedule AI line 24 also considers the amount of tax that would have been required under the non-AI method, and uses the lesser of the two. So you would not be worse off using Schedule AI.
Not worse off if one has made timely payments of the smaller of: 1) 90% of the income tax for the year or 2) 100% of the income tax for the prior year (110% for higher income taxpayers). In those cases, there would be no underpayment penalty and no reason to complete Schedule AI to try to reduce or eliminate the penalty.
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