Self-employed Tax Question

[Slug]

I have a couple questions from my DW. In her situation, she is a self-employed therapist who will have gross revenues not exceeding $20k in 2010.

1) Given the low revenues, does she have to pay quarterly taxes on that income? The explicit question is: Is it mandatory that she pre-pay these taxes on a quarterly basis or can we just wait until year-end?

2) If it is mandatory that she pre-pay quarterly, does she pre-pay based on gross or net revenues?

My hope is you will say it's advisable but not mandatory. As I am heavily taxed on my income in spite of all my claimed exemptions, I'm hoping it will be more of a wash where we can get a lower refund. However, I don't want to set her up for any trouble with the IRS.

Many thanks.

[wincrasher]

Paying quarterly is not required by law.

However, you could be subject to some penalties for "underpaying" throughout the year. If your deductions "wash" her income, then you shouldn't have any penalties.

[Scanner]

Wincrasher kind of hit it.

If you make a lot of money, and you don't pay quarterly taxes, you can get hit with a penalty (ies) for not making a good faith quarterly estimate. The gov't, after all, wants their money and for you to not earn interest on it. They want the interest after all.

However, if you are "overpaying" and she is "underpaying", it may actually be a "wash" on your joint return.

There is a complicated way to estimate what you should pay that is downloadable from Internal Revenue Service. IT comes with the quarterly payment coupons.

I did pay a $7.00 penalty last year because I was late on an estimated payment and I think I underestimated to boot. . .so no biggie.

I have found a good formula to use, for a middle class income around $100,000 combined household income is to withhold 25%. . .I usually ended up oweing a little becuase my soon-to-be-x had a little more withheld.

So at $20,000, setting aside 4 $1250 estimated payments is probably wise IMO unless you are really, really overpaying on your side. If you don't, you may get a significant penalty. I would advise that you at least send in something or take a couple of hours and do the worksheet.

I hope this helps and I hope it's accurate.

[Scanner]

Here is the IRS link for estimating your quarterly payments but it is for 2009 and they disabled the 2010 estimating guidelines for whatever reasons but they probably haven't changed much.

http://www.irs.gov/pub/irs-pdf/f1040es_09.pdf

Some light reading material for ya'

[Joan.of.the.Arch]

I think her Social Security credits are more likely to get properly recorded if she pays quarterly. If she pays annually (with penalties), how will Social Security know whether it was all earned in one quarter, two, three, or four?

[Slug]

Thanks all. I think pre-paying anyway will be the right approach given her risk tolerance and hatred of penalties.