Ask the taxgirl: 1099-MISC
Taxpayer asks: Quick question from a slightly embarrassed newbie.
Although I’ve been working as an hourly consultant for a few years, this year is the first year during which ALL of my income was received via 1099-MISC (I’m not incorporated in this state (Georgia), invoice an onsite consulting firm for my hours, and have checks sent directly to me without any taxes (to my knowledge) withheld).
I’m aware that I’ll have to pay those taxes come April 15th, but was just alerted to the fact that I was supposed to be paying ESTIMATED taxes every quarter (gulp…)
Soo…My question is: Is it worth it for me to attempt, at this late stage, to send the government %30 or so of what I’ve earned this year, or should I just go ahead and have an accountant give me the bad news in February? (Will I be fined, in some way, for paying it all in April, instead of sending a little each quarter)?
Taxgirl says:All is not lost! You probably won’t get reamed this year since you say it’s your first year in this situation - the IRS isn’t that bad. If you didn’t owe taxes last year, you can request that the penalties be abated for this year - there is a safe harbor (read on).
Generally, you should pay estimated tax if you are not subject to withholding. Realistically, this means that folks who rely on income that will be reported on a form 1099 (this includes self-employment income, interest, dividends and retirement income) are most likely to be responsible for estimated tax.
You will need to make estimated payments if you:
1. You expect to owe at least $1000 in tax for 2007 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2007 tax return or 100% of the tax shown on your 2006 tax return.
To figure your estimated tax, you can use form 1040-ES (download it here as a pdf) - the form also advises you of the due dates for each quarter. If you do not pay enough tax by the due date for each quarter, you may be charged a penalty even if you are due a refund when you file your income tax return (nice, huh?).
So, I say all of that to say that if you’re nervous, go ahead and send in a payment - it can’t hurt and may save you from being subject to at least one penalty. But be aware that you can’t avoid the penalty for missing an earlier payment by overpaying at the end since each quarter is treated independently. However, the penalties and interest accrue based upon how much time has passed since the due date, so making some sort of payment will mitigate your final bill.
But if you don’t make any payments, all is not lost. You may be subject to a penalty which stinks but isn’t the end of the world. You pay the penalty and you move on. Next year, you should plan on making the estimated payments. When you do your return, fill out the form 1040-ES at that time. If you’re using software, you can do it all at once (a package like TurboTax will ask you if you need to complete it - say yes!).
And it’s worth mentioning that the rules for estimated payments are different for farmers and fishermen. If you do either for a living, I’d recommend getting an accountant.
Remember that if you are subject to estimated payments for federal purposes, it’s likely that you may be subject to making estimated payments for state purposes, too. There are some exceptions - you should check your state’s rules to be sure.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the Taxgirl!
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tax, estimated tax, ask the taxgirl, penalties, 1040-ES, 1099-MISC
