Holy Sh… Estimated Taxes… WTF… as a Married Couple

Getting married is wonderful for so many reasons. Taxes is not one of them. Besides the horrific marriage fine levied by our tax lords if you happen to want to be an independent woman and continue working post tying the not, there’s also a whole host of tax intricacies which suddenly make TurboTax no longer a viable option and accountants your new BFF.

My husband is an independent contractor.  He usually makes anywhere between $80k and $110k per year, depending on how business is going. As a single person, he was able to take advantage of safe harbors designed to protect self-employed folks from overpaying taxes to avoid fines for coming short on estimated tax payments.

Safe harbors for estimated taxes for single, self-employed folks basically say that you can either pay 90% of your current year’s eventual tax bill OR 100% of your prior year’s tax bill. As a single person, this is pretty easy to figure out — even if it’s hard to guess what 90% of this year’s tax bill will be, you can pay 100% of your prior year’s tax bill and know you’re safe from fines, even if you end up owing more at the end of the year. If business isn’t going quite as well this year, you’ll get a refund, and you’ll give uncle sam a loan for a while, but it won’t be that bad.

Of course, getting married makes this all sorts of more complicated, requiring expensive accounting help to make sense of this mess.

Estimated tax safe harbor for higher income taxpayers. If your 2016 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2017 or 110% of the tax shown on your 2016 return to avoid an estimated tax penalty.

Thank you IRS for an explanation that is not clear at all. It sounds like if your AGI is over $150k as a single OR married person you are considered a higher income taxpayer. This means Mr. HECC would not have been considered a high income taxpayer as a single person, but now that we’re married we’re well over $150k and he can no longer use the safe harbors for his estimated taxes.

Instead, we have to pay 110% of our 2016 taxes (including my taxes) in order to not get penalized this year. Suddenly, my W2 withholdings are no longer an annoyance of over or underpayment to the government, but they can result in substantial penalties.

So – we need an accountant, stat. I consider myself fairly financially literate and the IRS explanation of all of this is the most confusing thing I’ve ever read.

Are any of you married with one partner earning W2 income and the other self employed? How do you manage your estimated tax payments?

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4 comments

  1. less says:

    I’m not an accountant but I play one on tv. Here are my comments:

    1. The underpayment penalty is basically interest. In 2016, the rate was .02656 (2.656%). That could add up to a lot if you underpay by a lot, but if you’re off by a little bit, it’s not much. (I underpaid by $300 in 2016 and owed $13.06 in underpayment penalty.)

    2. The rule is that a taxpayer filing as a single person or as part of a married couple filing a joint return needs to have paid at least 90% of the amount of taxes owed on the current year’s return, or 100% of the amount due the prior year, whichever is less, if the Adjusted Gross Income (AGI) on the return is less than $150,000.

    If the AGI is $150,000 or more, the taxpayer needs to have paid the lesser of 90% of the current year or 110% of the prior year.

    The safe harbor applies to married and single people, and to lower income and higher income taxpayers. In all cases, if you pay at least 90% of what you owe for the current year, you are not subject to penalty.

    The “married filing separately” numbers are different, but those numbers are different for a lot of things, and in general, the only reason you would want to file married filing separately is if you think your spouse is doing something illegal and you don’t want to share a return with him/her. The tax code was designed assuming that married people share a household and share finances and will file taxes as a combined unit. So I’m not even going to get into the married filing separately stuff. If you don’t want to file a combined tax return, you probably shouldn’t be married.

    3. The difference between filing as a single person and filing a joint return is that you are now looking at your combined income and tax liability, and your combined tax payments.
    Assuming that your household is going to make as much or more next year than it did this year, the easiest way to make sure you pay enough money is to look at your 2016 return.

    Here is what you need to do.

    Take the total tax amount. This number is given on Line 63 of your 2016 Form 1040. (Note that this is not the amount that you paid in withholding, but the total amount of taxes due. For many people, their withholding is more than this amount and they get a refund of the difference.)

    If your AGI is more than $150,000 multiply this number by 1.1. (This gives you 110% of your prior year tax.) Divide the result by 4. This tells you how much you should be paying each quarter.

    At the end of each tax quarter (which are funky for individuals: they are March 30, May 31, August 31, December 31), look at your pay stub to see what your YTD federal withholding is. Do NOT include social security tax or medicare. Just look at Federal income tax.

    Compare that YTD withholding number with the number you calculated above that you should be paying each quarter. Is the amount withheld more or less than the amount you should have paid based on prior year taxes?

    If the amount withheld is more than the amount you calculated, you don’t need to do anything, you are caught up. If the amount withheld is less than the amount you calculated, you need to submit a payment for the difference. You can write a check or you can register for online payments through EFTPS.gov.

    As an alternative to making estimated tax payments, you can increase the withholding in your paycheck to make up the difference.

    Here is an example with actual numbers.

    Let’s say your taxable income in 2016 (1040 line43) was $180,000 so you owed $37,386 in income tax. 110% of this amount is $41,124. One quarter of this is $10,281.

    You should pay $10,281 by 4/15, $20,562 by 6/15, $30,843 by 9/15, and $41,124 by 1/15/2018.

    If you do that, even if you make more money and actually owe, say, $60,000 in taxes, you will not owe an underpayment penalty. (But you will have to shell out another $20,000 by 4/15/2018.)

    HOWEVER, this strategy would result in you overpaying taxes if you make less in 2017 than you did in 2016. If that is the case you should use the forms in Form 1040-ES

    https://www.irs.gov/pub/irs-pdf/f1040es.pdf

    to calculate what your actual tax liability is likely to be in 2017 and pay 90% of that.

    This may have just confused you more but that’s how it works.

    And also I just need to say that if you think the bit about the self-employment safe harbor is the most confusing thing you’ve ever read from the IRS, you clearly haven’t spent much time reading things from the IRS. I wouldn’t even put that in the top 10.

    1. Joy ( User Karma: 0 ) says:

      Thank you so much for the explanation. I think for married couples who earn less than $150k joint it is not that big of a deal, it’s tough for us so-called high-income earners because then we have to pay 110% of our total year divided by 4, which is not that bad unless one of us loses our job or doesn’t make near the amount we made last year (possible) and then we overpay by a lot and need that money to survive. I’m used to W2 so I typically underpay a bit but plan to pay out at the end of the year. We’re going to an accountant to have them help us figure this out. I definitely understand this is not the most complicated part of tax law – it’s just being married is costing so much money in taxes plus having to hire outside help when originally we could file our taxes alone without a problem.

      1. less says:

        The best strategy if you think you’re going to be making less in the current year than you did in the prior year — or if it’s important for you to not overpay, for whatever reason — is to track your income (and deductible expense, if you are self-employed or likely to have itemized deductions that are more than the standard deduction) on a quarterly basis so you pay just what you owe with each quarterly payment.

        That is more complicated than paying a quarter of the prior year’s taxes, but it’s also more accurate.

        For most years when I was self-employed I had no idea what my income would be from year to year so I didn’t want to pay a quarter of the prior year taxes since if I made less, I would be paying too much, and I never wanted to pay too much. My goal was to owe $100 or less in April.

        I set up an estimated tax spreadsheet where I could input my income and expense by month, and it would divide it into the proper quarters and calculate my quarterly payments. It was very accurate, and fine to work with as long as I kept up with it and put in all my income and expense. It also made doing my taxes in April much easier because all of the data was already in one place.

        The IRS Form 1040-ES has some worksheets you can use to estimate your 2017 income and determine quarterly tax payments. Not as elaborate as my spreadsheet, but same idea.

        1. less says:

          Also I just realized that one of the reasons taxes are such a mystery to people is because people do everything online and never get a chance to see the actual forms.

          If you look at a printed copy of the 1040 (download one from irs.gov) and related schedules (Schedule C and Schedule SE for self-employed people; Schedule A for itemized deductions), you can see exactly which items are included where. You can see what deductions come out first in determining Adjustable Gross Income (i.e., “above the line” deductions) and what is included in itemized deductions.

          The IRS instructions to the forms are pretty impenetrable but I’ve found the Publications very helpful. They often give a variety of examples so you can put the explanation in context.

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