Hi Wayne:
I am a Personal and Business Coach and that income requires quarterly self-employment tax payments as estimates of that year’s taxes. I also earn some occasional income through a couple of other businesses who hire me as contract labor. The income I earn through those businesses gets reported on 1099-Misc under section 7. Nonemployee compensation. Does that income also need to be included in the quarterly self- employment tax payments? At what point of income MUST you file the quarterly payments?
Thanks so much!!!
Sandy Burton BLISS PERSONAL COACHING http://www.blisslifeguide.com
Great question, Sandy:
The answer to your first question is a resounding “Yes”.
ALL your self-employment income, regardless of source, and regardless of whether it is reported on a Form 1099-MISC, must be reported on your personal income tax return, and is therefore subject to BOTH income tax and self-employment tax.
Since all your self-employment income is subject to both income tax and self-employment, then you must also consider all this income when calculating your quarterly estimated tax payments.
You refer to these quarterly payments as “self-employment tax payments”. Please do not misunderstand this key point: if you are self-employed and filing a Schedule C on your personal income tax return, these quarterly payments are for BOTH federal income tax and self-employment tax.
Your second question, “At what point of income MUST you file the quarterly payments?”, is a little more complicated than the first.
There are a couple rules that come into play when calculating quarterly estimated tax payments.
The first rule is this: Generally speaking, you should make quarterly estimates if you have a balance due on your personal income tax return of at least $1,000.
How do you go about calculating your quarterly estimates?
You have 2 options:
OPTION #1: “The Safe Harbor Rule” says that your estimated payments must be at least as much as the previous year’s total tax liability. So, for Year 2002, you should have paid in an amount equal to or greater than your Year 2001 tax liability.
OPTION #2: “The 90% Rule” says that your estimated payments must cover at least 90% of your current year’s tax liability.
Which option should you use? In classic “tax expert” jargon, “IT DEPENDS”! It depends on your particular situation, of course.
But again, here’s a rule that can help you decide — the MINIMUM amount that you must pay to avoid penalty is the lesser of Option #1 and Option #2.
So, you can calculate your estimates both ways and then just pay whichever amount is less.
Now, a practical point to consider: which is easier to calculate — Option #1 or Option #2? Obviously, #1. You know what your previous year’s tax liability was long before you know what your current year’s liability is going to be.
So for most self-employed folks, Option #1 is much easier to implement, and it’s the way I recommend that most Schedule C-er’s do it.
Just take the previous years total federal tax liability and divide it by 4. Voila! There’s your quarterly estimated tax payment for the next year.
FINAL COMMENT:
These payments must be made in 4 equal installments. If you wait until the 4th quarter to pay the whole year’s estimate, you can still get hit with an underpayment penalty.
Sandy, I’m so glad you asked this question! Why? Because not only is your Year 2002 income tax return due on April 15, 2003, but so is your 1st Quarter estimated tax payment for Year 2003!
Here’s the schedule for Year 2003 federal quarterly estimated tax payments:
Quarter #1 — April 15, 2003
Quarter #2 — June 15, 2003
Quarter #3 — September 15, 2003
Quarter #4 — January 15, 2003
Use Form 1040-ES to make the payments: http://www.irs.gov/pub/irs-pdf/f1040e03.pdf
Don’t try to make sense out of these “quarters” — except for Quarter #1, they don’t correspond to the calendar quarter. Don’t ask me why — all I can say is “that’s taxes for ya!”
Wayne M. Davies is author of 3 tax-slashing
eBooks for small business owners and the self-employed. For a
free copy of Wayne’s 25-page report, “How To Instantly Double
Your Deductions” visit http://www.YouSaveOnTaxes.com
