My husband just started his own business providing landscaping and remodeling, and we were advised that he should pay quarterly taxes. But we plan on filing jointly at the end of the year. Can he still make quarterly payments if we file together at the end of the year? If yes, do I figure his estimated AGI separate from my AGI to figure out the quarterly payments?
If the operation is profitable from a tax point of view, he should be making quarterly estimated tax payments. There are a couple of ways to figure the amount of the quarterly payments.
For the first year of the business, if one spouse is employed and has taxes withheld from her or his pay, as long as the withholdings for this year are equal to or exceed last year's tax liability (Line 63 on Form 1040), the other spouse does not have to make quarterly payments this year, as long as he or she pays any additional tax due by April 15, 2019.
On an ongoing basis, you both should project the tax liability -- based on your combined AGI less your standard deduction and child tax credit(s), plus the self-employment tax on the sole proprietorship's net taxable income -- subtract any taxes being withheld from either spouse’s wages, and make estimated payments to cover the balance.
The self-employment tax rate is 15.3 percent, and the net self-employment tax for someone with self-employment income between $400 and $128,400 in 2018 is about 14.13 percent.
There are two ways to avoid an underpayment penalty. The easiest is to pay in through withholding and four equal estimated payments totaling at least the amount of the prior year's tax liability.
The second way is to pay in through withholding and estimated payments at least 90 percent of the current year's tax liability. The quarterly payments should be equal in amount, although unequal payments based on the actual annualized profitability of the business can be acceptable. Since the business's annual taxable income will most likely be unknown during the year, the first and easiest method is most often used.
While the estimated tax payments are generally due on April 15, June 15, Sept. 15, and Jan. 15, the amounts of tax liability to be covered by the payments is 25 percent on the April 15 payment, 50 percent for the combined April 15 and June 15 payments, and 75 percent for the combined April 15, June 15, and Sept. 15 payments.
I encourage you to visit the IRS website to obtain additional information under forms and publications.
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.
Answered by: James F. Hay, CPA, is an associate professor of accounting and business at Wilson College.