Have a new job making much more money, how to pay tax ahead of time to avoid penalty

[liu3]

Registered users do not see advertisement

Hi,

Have a new job this year and make much more money than last year. Tax is not withheld enough. What do I do to avoid the penalty next April?

[taxforum]

Which tax is not withheld enough? Are you talking about income tax? Are you sure that it is not withheld enough? How do you know that it is not withheld enough?

[liu3]

Last year I got a penalty because TurboTax calculated that we didn't pay enough income tax (my employer didn't withhold enough, I guess). I got a new job 2 months ago and I am earning much more this year so I am guessing it (penalty) is going to happen again. We have 2 young children and my husband and I claim 4 for tax exempt according to the w-2 form calculation. I was told that one of us (my husband or I) should claim 0 for tax exempt. I just don't want the penalty happen again. How can I avoid it?

[skier_j]

This happens more frequently than might be expected. Especially if both wage earners are earning about the same amount annually. What happens is that Withholding is bases on each income being the ONLY income for the entire household of 4 people. the withhholding might be enough to cover the single wage but the combined withholding will not cover the combined wages.

WHY?? Because each wage, might be firmly in the 10 to 15 % bracket but combined the last dollars might be subjected to a rate higher or even MUCH higher than the withholding allowed fro. Like 28%.

as you can imagine, stacking similar incomes on top of each other can have, in my example, a 13% differential on the last dollars earned as compared to the frist dollars earned.

make sense??

the worst situation is each earning almost equal amounts, the best situation is one earning the substantial portion of the total and the other earning a minor amount of the total.

If the new situation and job you described is going to move you from an equal wage to a much more uneven spread, you may be just fine.

You ave turbotax, do some projections based on current pay stubs.

You always have the right to ask HR to withhold more.

[liu3]

Thanks.
Besides asking our employers to withhold more now (might be too late?), any other way we can pay IRS now with a big check?

[skier_j]

use turbo tax to estimate how much, then use it to find and fill out a form 1040 ES (for estimated payments) send the form as well as your check to the IRS. pay attention to mailing addresses as they are not usually the same as the address you file your 1040 at. You can also go to www.IRS.gov fro the form and instructions

[skier_j]

Originally Posted by liu3

Thanks.
Besides asking our employers to withhold more now (might be too late?), any other way we can pay IRS now with a big check?

the thought just occured to me that if a penalty is all you want to avoid, there are some 'safe harbors' that you should check into.

If your tax payments in any given year are in excess of your total prior years tax, then there will be no underpayment penalty. If all payment are by withholding, no problem---There might still be a penalty in the case of estimated payments due to the fact that one or more might be paid late even if the total is greater than last years tax.

Do some simple math to see what your withholding for 2008 will be at year end, estimated as best you can. If it is equal to or exceeding last years tax you are done---and covered for the underpayment penalty.

You might still have a balance at April 15th, but no penalty.

[liu3]

We are $7000 under withholding comparing to last year. So we need to get the employers to withhold $7000 before Dec. 31 I guess. I wish there is a way we can just write a check of $7000 and mail it to IRS.

[skier_j]

see response #6

[liu3]

Hi,

I called IRS and the lady said I am too late for 1040ES since they are 4 payments of them and I had already missed the first 3 deadlines. Is she correct?

[skier_j]

Let me put it this way, you cannot rely on a telephone answer from teh IRS as a defense.

Also, over the past 28 years, I have had clients pay single estimated tax payments for any number of reasons without repercussions.

I'd also point out that there are 4 due dates for the estimated tax payments, April, June, September and January 15. So, even tho 3 dates have passed, one is still on the horizon.

The best scenario is to increase withholding because the underpayment penalty is based on what was paid when as compared to the tax liability as computed periodically through the year.

the key difference between 4 estimated payments of 5,000 each or withholding of 20,000 for the year works like this.

Assume 5000 paid on each of these dates. May 1st, June 13th , sept 13th and Dec 31.

You will incur a penalty for the frist payment period since it was 2 weeks late.

Withholding is DEEMED to have been in equal installments regardless of when they were actually withheld. If I had control; of withholding, many times I'd issue a december 31 pay check to a client and withhold it all to avoid penalties since that dec wh was deemd to have been spread out evenly through the year.

that said, you probably don't have the ability to control that much additional; withholding and that leaves an estimate as the only alternative.

pay it on the 4th qtr form, now, and you will at least cut down on any penalty that you may incur.

[liu3]

Hi,

Thanks for all the explanations. So, as long as our Fed withholding is greater than the amount in the 1040 form line 63 from last year then we are OK?

[skier_j]

generally speaking, subject to my explanation above, yes.

Line 63 would be the number to beat

[liu3]

OK. Great. I think we will be able to withhold as much as we can for these 2 and 1/2 months to beat that number. Thank you very much.

[skier_j]

yep, remember that withholding more than line 63 only stops the underpayment penalty---you still could owe at filing time.