Ups and Downs of Internet Income

How do you "estimate" your Tax payments

[adamxcl]

It's that time of year where I wonder about making estimated tax payments. I know the best reply is to see your accountant or lawyer but there must be someone else who either does this themselves or at least wonders about it. Give too much and you're loaning the govt interest free money. Give too little and you could be penalized in the USA.

I never know what I'm going to make and that guessing game becomes more crazy as time goes on. With one search engine update here and there, one can go from $100 a day to $25 a day to $2,000 a day. And you never know how long it will last til the next ranking shake up dramatically alters the landscape of your business and pocketbook. In the last several months, my rates have gone from middle class to the highest tax bracket and then the poor house. It can be quite a rollercoaster.

[NickCoons]

In the US, you aren't likely to be penalized in underpaying quarterly estimates, so long as you're not tremendously off. I mean, if you pay $1 and you should have paid $2000, then yeah, that won't look good. But if you estimate that you would owe $1500 and pay it, but the real figure comes out to $2500, then there wouldn't likely be any penalties. You'll simply have to make this up at the end of the year.

Estimated quarterly payments are the self-employed person's tax-withholding equivilent. If an employer doesn't withhold enough, the employee doesn't pay penalties.. they just pay the difference.

[jonrichd]

I believe that if you estimate/withhold 100% of the tax paid in the previous year, you won't have to pay a penalty. Of course, this could hose you if you make less this year than you did last.

If you don't have a good relationship with an accountant, you might want to either download the estimated tax instructions from the IRS, or if you use one of the DIY tax return packages, they generally have good calculators that walk you through what you should need to estimate. Also, keep in mind that you can vary the amount of estimated tax you pay each quarter as your annual income becomes clearer.

But, I'm not an accountant.

[ControlEngineer]

I am not an accountant or lawyer. So when it comes to tax law, I don't know anything.

I am a engineering consultant with self-employement income (much the same as most non-incorporated internet businesses. Each year I meet with my lawyer to do my taxes. After he enters all of the information into his computer program and it calculates my taxes for the past year it then calculates the estimated taxes for this year, based on my taxes for last year.

My income varies greatly from year to year. The economy has had its ups and downs (hoping for an up for a change), and also I have problems like having heavy travel expenses (and deductions) in one year for a project and receiving the payment the following year. So the first years income is low. The second year the income is higher (big check, no deductions). So the estimated taxes that year are too low (based on the pervious year, with low income). However, as long as I pay the estimated tax based on the previous year's tax I am OK.

The lesson: If you have income from web (or other) activities other than a "real" job with tax withholding, see a lawyer or accountant. They know the details. They can also help with finding deductions. It is well worth the cost.