Residential Real Estate Agent · Mt. Pleasant, SC · Member since 2010 · 257 posts · 130 votes
After my first year of self-employment, I have found out that the interest rate on underpayments is currently only 3%. Does anyone intentionally not pay quarterlies, knowing that they can invest that money and make more than the 3% during the year? Obviously, you would need to plan even more carefully to ensure that you could afford the whole payment next April. What other considerations are there? I've never heard this discussed, which means that it's either a dumb idea and thus no one does it or it's obvious and everyone does it.
The one exception being when I used to play poker very seriously (and had some significant reported winnings)...I'd pay taxes on those at the time of the winnings, as the swings could be large and there was no guarantee that the funds would be liquid on April 15.
I don't pay quarterly payments either as a RE investor, just the one bill due April 15th. I did pay quartly payments when I had my printing company, but that was different.
The IRS will wait for my money until April 17th this year.
For most of my cautious clients, they want to avoid the penalties out of fear. For many of my real estate clients, they are intent on making as much as possible and realize they can make more.
Will Barnard is correct. Plus in addition to that, if you are smart and have ways to offset your income, than you will be fine. Many wage earners also will have increased withholding from their employer to offset the tax.
Due to my structure personally I'm not liable for any penalties and if I was they would be miniscule in comparison to what I earned.
Well, this is actually a great idea and I usually tell my cleints that with careful planning you could come out on top. Point to consider.
If you are self employed, your income is not always stable so you could use the annualization method to reduce the amount of penalties you pay by showing that you earned your income in later months rather than the earlier months.
Also, there are also other tax reduction startegies like setting up a retirement plan and maybe with a SOLO 401(k), you can invest using the Solo money and not your regular income, this can also cut down your taxes.
You can also use entity structuring to do a hybrid ownership interest in an S corp or Multi-member LLC and thereby reduce your self employment tax which will ultimately reduce your penalties for paying late.
If you did decide to do an S corp, you can pay your salary in the 4th quarter and that;'s when all the payroll taxes will be due Jan 31st of the following year.
I hope these little tidbits help and no, it's not a dumb idea. It is a smart idea and you are looking for ways to make your money work for you.
We owe money this year, but not enough to pay penalties. I would rather pay penalties than cough up money quarterly as other have commented on.
Between Federal and State, we owe a little over $20K this year...according to the return my CPA did, there are no penalties owed. I was certainly expecting penalties (and would have happily paid them), but now I feel like I got a decent sized interest free loan from Uncle Sam... :)
I haven't had to pay estimated taxes in previous years and so I hadn't really looked at the penalties, but reading these posts makes me think I shouldn't worry about it and just pay the taxes and any penalties in April each year. Is there any downside to doing it this way?
Claim 0 and have extra withheld w2, pay several thousand and a small penalty. The small penalty is worth not having the hassle of paying estimates. Have paid many quarterlies in my life though.