Wife is self-employed, do we have to pay quarterly taxes?

My wife works from home as a medical billing processor and receives a 1099-MISC from the woman that owns the business. I believe that technically we are supposed to make quarterly estimated tax payments on this, but we have never done so, and have never received a penalty. 

We do set aside 25% of every monthly check into a YNAB budget category so we have the year-end tax bill covered, but sending in a payment quarterly feels like more of a hassle than its worth. 

My question: Is the penalty automatic and baked into TurboTax somewhere and we just aren't seeing it? Or does the IRS have to come after you to actually hit you with this? 

Total gross income on this side hustle has so far been less than $30k annually, if that matters. 

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  • If you owe more than $1,000 in taxes, you need to pay estimated taxes. 

    https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

    I would wait for the IRS to bill me for any interest and start estimated taxes this year.

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  • As with most things related to income tax, the answer is complicated.  You are not required to make estimated tax payments solely because you have self employment income.  You can avoid a penalty by hitting a safe harbor that has several twists and turns depending on your total tax picture; for most people the safe harbor is to have withholding and/or timely estimated tax payments equal to 100% of your prior year tax obligation or 90% of your current year tax obligation.  The prior year tax obligation is a known number from your prior return, but you don't know the current year obligation with certainty until you have enough information to file the return.  (Many details omitted; do more research if things are not clear for your situation.  The link jayne_m provided is a good place to start.)

    If you are married filing a joint return, and you (the husband) have a W-2 job that witholds taxes, it may be possible to simply have enough withheld from the W-2 job wages to cover the couple's tax liability.  That would avoid any penalty.  It is also possible to have taxes withheld from payments reported on a 1099-misc.  I don't know whether the entity that uses your wife as a contractor is required to offer withholding; but if it is required or offered voluntarily, that would be another way to meet or partially meet the safe harbor payment rules.

    You can also make estimated tax payments, but it is frequently more convenient to simply arrange enough withholding on some of your income as a couple to avoid a penalty.

    Yes, TurboTax will automatically compute a penalty.  If you have one, it will show up on Line 79 of Form 1040.  If the amount of a penalty is not material, it's easy to overlook it.  I have a penalty for 2017, because I messed up my calculation of estimated tax payments in my first full year of retirement.  The penalty is $3.  The damage to my pride is worse than the financial damage.

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      • Matt Tanner
      • Khaki_Sidewinder
      • 3 yrs ago
      • Reported - view

      Patzer Thank you for the very timely, thorough response! I am going to dig into my current return and see if there was a penalty, but will probably just bite the bullet and start sending these quarterly. The money is just sitting there anyway. 

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    • nolesrule
    • Been waiting 5 years for the Stealing From the Future fix...
    • nolesrule
    • 3 yrs ago
    • 1
    • Reported - view

    Read up on Form 2210. You have to compute if you have had enough income withheld via withholding, based on certain criteria. If not, then you have to also make quarterly estimated tax payments either proportionally to your income or in even amounts each quarter, and still meet the withholding and estimated tax safe harbors amounts. if you don't, then you will owe a penalty, which is calculated on Form 2210.

     

    https://www.irs.gov/forms-pubs/about-form-2210-underpayment-of-estimated-tax-by-individuals-estates-and-trusts

     

    As for how much, I would suggest you look at your marginal federal tax rate on your wife's self-employment income and add an additional ~14% (Self employment taxes on Schedule SE = Net Income from Schedule C  * 0.9235 * 15.3% [assuming no other sources of employment income that would max out SS wages]). If you are in the 12% bracket, you should be reserving about 27% of the income. If the 22% bracket, 37% of the income. It's possible the income may straddle brackets. Self employment taxes are considered a federal income tax liability even though they are medicare and Social Security taxes.

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      • Matt Tanner
      • Khaki_Sidewinder
      • 3 yrs ago
      • Reported - view

      nolesrule Thanks, as always, for the input! It is always appreciated. 

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      • nolesrule
      • Been waiting 5 years for the Stealing From the Future fix...
      • nolesrule
      • 3 yrs ago
      • Reported - view

      Matt Tanner No problem. I'm not a tax preparer, but I understand how the mix of SE income and regular income works.  Just remember that the withholding amount from W-2 wages will make a big difference on whether you need to pay estimated taxes or not, and also whether there will be a penalty or even a need to use the full form to determine if there is a penalty.

      The penalty itself is not a big deal assuming you have saved up the money and can afford it. But that's the key. When you hear the horror stories about people owing the IRS money, most often it's the self-employed who weren't setting aside money for taxes.

      The past tax returns may not help you much for 2018 though, because of the tax bracket changes and other changes. You may want to do a tax projection for 2018 and also calculate what you expect your total W-2 withholding to be for the year and compare the numbers.

      I like to use the MMM Case Study spreadsheet. use the 2018 version which can be found through this link: https://www.bogleheads.org/wiki/Tools_and_calculators#Personal_finance_toolbox

      As a tax liability estimator it is fairly accurate for most common cases.

      It will also calculate the SE taxes.

      I would then take the estimated tax liability number from the spreadsheet (1040 taxes + SE taxes) as well as your W-2 withholding estimate for the year and plug them into 2210 to see how close you're going to be.

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