Estimated Payments

Gina Gogetter, a Washington D.C. based realtor took home $400,000 in commissions last year. Gina chose to celebrate her success by moving into a larger home, purchasing a sports car and flying her extended family to Monaco for a reunion. When Gina filed her taxes, her accountant told her she owed $140,000 thousand in taxes from her commissions. Unfortunately, Gina had already spent everything and ended up paying penalties and interest on the unpaid taxes for the next two years while she worked hard to make enough money to pay down her balance.

Homer House has a 9 to 5 job and occasionally rents a room in his apartment out on the weekends through Airbnb. Homer chose not to make any estimated tax payments on his hosting income. At the end of the year when Homer prepared his taxes he ended up owing some some money in addition to what was withheld from his paycheck (because of his rental activities) but he had planned ahead so making the additional payment was easy.

Rich is a science fiction writer who has diligently paid his estimated taxes on time for years. Since Rich hadn't published anything new this year he thought his tax liability was going to be lower than the prior year so his estimated payments he had been making were less than prior years. Unbeknownst to Rich, a book he had published years ago made the NYT best seller list due a renewed interest in life on Mars. Needless to say, when Rich filed his taxes he found out the payments he was making did not cover 90% of the tax due on his current return, or 100% of the tax due in the prior year so he was subject to an underpayment penalty.

Mohammad is an avid service provider on Taskrabbit. He didn't know about estimated tax payments until he visited 99deductions in July, and by that point he had already missed the first two quarterly payment deadlines. Mohammad remembered the old adage “a dollar today is better than a dollar tomorrow” and figured the IRS would agree. He estimated his tax liability for the first two quarters and sent in the second payment voucher from the bottom of Form 1040-ES along with a check to the IRS on July 20th. The government happily accepted his tax payment even though it was a little late. When Mohammad prepared his tax return at the end of the year, he still owed some interest for his late payment, but not nearly as much as he would have owed if he let the overdue payments ride all year.