Estimating Taxes Within the IRS' Good Graces

Dear Tax Talk,

My wife works as a private home care nurse. She will receive a 1099 form at the end of the year.

Is she required to submit estimated tax payments when the estimated taxes are based upon last year's return, when she was a W-4 employee? How does one calculate the estimated taxes when there is no viable income with which to compare? Her hours, pay rate and benefits are drastically different.

What are the requirements of a self-employed person who is working as self-employed for the first year? How does this affect or how is this affected by my income, which is W-4 based?

Lastly, what, if any, are the state requirements? I live in California.

Is this something that taxpayers can do themselves, or is it something that a tax expert needs to handle? Thank you for your help. 

- Daniel

Dear Daniel,

Your wife may be required to submit estimated tax payments if you end up owing $1,000 or more in taxes for 2014 after subtracting your withholding and any "refundable credits."

You can avoid the "penalty for underpayment of estimated tax" for 2014 if you pay 100% of your 2013 tax if your adjusted gross income, or AGI, was $150,000 or less. If your AGI was more than $150,000, then you can avoid the penalty by paying 110% of your 2013 tax. However, for all taxpayers, if at least 90% of your 2014 tax liability is paid through withholding or estimated tax payments, then the penalty is avoided.

Due Dates for Estimated Tax Payments

Payments are due quarterly. For 2014 the payment due dates are:

  • April 15
  • June 16
  • Sept. 15
  • Jan. 15, 2015

So you can use the "safe harbor" estimates above or sit down and do your best at figuring out what your 2014 tax liability may be. Don't forget to include self-employment taxes that will be due on the Form 1099 income. You may have to do this every quarter, and then adjust as the real numbers are known. This may get complicated and you may want to have some help on this. Most professionals have "tax projection" software for 2014, which makes their job much easier when working with clients in your situation.

Use Form 1040 ES for your estimated tax payments. You will have to check with California regarding its estimated tax requirements. I limit my answers on questions to federal tax issues only.

Thanks for the great question, and I want to point out that you are to be commended for asking this question now, as this is the time to figure all of this out and not next April 15, when it is too late.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

Copyright 2014, Bankrate Inc.