Taxpayer asks:

I’m a recent college grad working 2 full-time jobs and doing some freelance work on the side. I have recently been asked to provide a w-9 for a $300.00 invoice I sent to a client, who happens to be my old boss. I was wondering, how much money should I withhold to pay my taxes? Also, do I have to file quarterly, or can I wait until the end of the year?

Thanks so much!

Taxgirl says:

To the extent that you have proper withholding on your full-time jobs, you won’t need to worry about estimated payments for income related to those.

However, with respect to your freelance job, you may need to make estimated payments. The general rule is that you need to make estimated payments if you expect to owe more than $1,000 in tax and you expect your total withholding and credits for 2009 to be less than the smaller of:

  • 90% of the tax to be shown on your 2009 tax return or
  • 100% of the tax shown on your 2008 tax return.

There is an exception, which I’ll point out especially since you note that you’re a recent college grad: You do not have to pay estimated tax for 2009 if you had no tax liability for the full 2008 tax year (partial tax years don’t count). You had no tax liability for 2008 if your total tax was zero or you did not have to file an income tax return.

With respect to the timing of the payments, you should pay in four equal installments.

Note that you don’t have to make that 4th payment in January if you file your 2009 return by February 1, 2010, and pay your total tax with that return.

To figure out how much to pay, you have a couple of options:

  1. Estimate your tax due for the year 2009 and pay at least 90% of the tax – just divide 90% of your estimated tax liability into four equal installments.
  2. Pay 100% of prior-year tax or 110% of your prior-year adjusted gross income over $150,000.

You can figure how much to pay using the estimated tax worksheet found on the form 1040-ES (downloadable here as a pdf). You can also use a software package like TurboTax to figure the tax for you (I highly recommend this option). The form 1040-ES also explains where to send your payments.

If all of this seems much too complicated, you can always ask your employer to simply withhold a little more on your paycheck so long as the numbers work out.

One more note: There is a quirky provision in the 2009 stimulus bill that provides some relief for those who have to pay estimated tax. If your 2008 AGI shows that at least 50% of your income came from a “small business” (fewer than 500 employees) and your AGI is less than $500,000, you can pay just 90% of your prior year’s tax to avoid a penalty instead of 100% – the 90% also applies to the those with AGI more than $150,000 (meaning that you can pay 90% instead of 110%).

Estimated payments can be tricky but don’t panic. There are lots of opportunities during the year to “fix” any bad estimates (for example, if you’re making lots more than you planned) and safe harbors apply for those taxpayers subject to the estimated tax for the first time. Once you start making estimated payments, it’s pretty easy to figure it out for the next year: usually, the first year is the most difficult (that’s why they have the safe harbors!).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

Comments

  1. For many years, while I was working, I never used those stupid ‘extra exemptions’ to have my withholding calculated on my paycheck! I simply used my actual taxes for the previous year, divided by 52, and had that amount (rounded up) withheld from my weekly paycheck. As this was alway 100%+ my previous years actual taxes, no penalty ever applied. Now that I am retired, I use that method to calculate my estimated payments: (last years actual tax / 4 ) for each quarter’s estimated 1090e or 540e payment. California got ‘sneaky’ this year and requires 120% for each of the first 2 quarters and 80% for the last 2 quarters; however, you just have to be careful to know the requirements and have the cash available to pay whatever additional you may need for the final return.

  2. Fred –
    That’s a great idea!
    There are a lot of practitioners who are very picky about the way that folks should do their estimated taxes. I say: whatever works for you!

  3. Ugh, estimated payments. Hate them but gotta make them.

    I have paid the same in estimated taxes for the last three years, even though my tax burden has dropped (buying a home and being smarter about deductions helped). Still, I haven’t changed my estimated payments because it has taken care of any additional tax bill I’d have due in April. Anything I overpaid is rolled over into the next year’s payments. Works for me!

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