Timing ES Payments

Today TaxMama hears from Sue in Nevada with this question. “I am retired and working part-time as a consultant. All of my income is reported via ‘’1099’’ (not W-2). I must pay quarterly ‘’estimated taxes’’ (Form 1040-ES). If I pay the majority of my estimated taxes in December, will I be penalized?”

TaxMama answers a question on Tax

Dear Sue,

If you’ve been earning money all year and not making estimated tax payments, you certainly will face underpayment penalties.

The question is, how much are those penalties? And is it worth it to pay them for the benefit of using that extra money all year?

The penalties are fairly low – about half a percent per month. You can see the rates on page 3 of the Form 2210. http://www.irs.gov/pub/irs-pdf/f2210.pdf

This may be a lot lower than the interest rates on your credit cards or home equity lines, if you would have had to borrow to cover the estimated payments. As long as you file and pay all your taxes by April 15th, you won’t be paying interest on that as well.

Incidentally, if your income was earned in uneven clumps during the year, considering using the penalty computation on page 3. It charges interest on each quarter, as you earn the money. Sometimes, that can reduce your penalties.

Here’s a link to the 2009 Form 1040-ES so you can make your estimated payments when you’re ready. http://www.irs.gov/pub/irs-pdf/f1040esn.pdf

Don’t forget to use every deduction you’re entitled to, to reduce your taxes.

And remember, you can find answers to all kinds of questions about estimated tax payments and other tax issues, free. Where? Where else? At TaxMama.com.
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