Self Employment Taxes

3 Replies

I work full-time and have a side gig as a Realtor. I will probably only turn over about 6-10 transactions a year, equating to $14,000 to $24,000 gross additional income. I've read through the Self-Employment tax documents. In future preparation should I be making the quarterly payments on that estimation? Or wait until near the end of the quarter and make payments based on the actual income I've made. 

What type of penalties could I expect if I wait until end of year to complete tax computation? Thanks for you help in advance. 

@Jacob Plocinski

Do it at the end. Expenses, salary, dividends etc will be easier and cheaper for you at tax time -January or April. Minimal if any penalties. Your accountant can help. You can also pay yourself in December for the year and alleviate any penalties if you would have any. Some of the BP accountants hopefully will chime in. 

Originally posted by @Jacob Plocinski :

I work full-time and have a side gig as a Realtor. I will probably only turn over about 6-10 transactions a year, equating to $14,000 to $24,000 gross additional income. I've read through the Self-Employment tax documents. In future preparation should I be making the quarterly payments on that estimation? Or wait until near the end of the quarter and make payments based on the actual income I've made. 

What type of penalties could I expect if I wait until end of year to complete tax computation? Thanks for you help in advance. 

If this is the first year of your side gig, then you probably don't have to make estimated payments to avoid the penalty. But, make sure you set aside the amount of SE taxes and ordinary tax you will owe on your commission when you file your return. 

The reason I say you don't have to make payments this year is because of this provision. 

Estimated Tax Payments:

Lesser of

  1. 100% of the tax shown on the taxpayer's return for the preceding year or
  2. 90% of his tax for the current year.

2018 AGI was over $150,000 ($75,000 for marrieds filing separate returns) must pay the lesser of

  1. 110% of the tax shown on the 2018 return
  2. 90% of their 2019 tax liability


Four times a year, 25% of the “required annual payment” for the current year. Note: The 25% requirement is applied separately to each installment. Thus, a taxpayer may be penalized for the underpayment of estimated taxes for any installment for which his estimated tax payments plus taxes withheld from salary (and certain other payments) don't total at least 25% of the required annual payment.


As you can see that your employer is going to witheld required amount form your W-2 that will satisfy the 100% of PY taxes, so there will be no penalty. However, next year, your employer withholding is not going to be enough, there is a way to avoid the penalty without making payments as mentioned below.  

This will be applicable next year: 

Exception: Income tax withheld by an employer from an employee's wages or salary is treated as paid in equal amounts on each of the four installment due dates unless the individual establishes the dates on which the amounts were actually withheld. Thus, if an employee asks his employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated. This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.

If you follow this, you still have to make a tax payment when you file your return, so again make sure you set aside cash as you will owe more during filing time as you didn't make estimated payments.  

@Jacob Plocinski

First, they call it estimated payment penalty, but it is actually interest, with the current annual rate of 6%.

This is how it works. Say you end up short $4,000 for 2019 taxes. The IRS wants you to pre-pay this $4,000 in four $1,000 payments, 4 times a year. If you pay it as one $4,000 payment on April 15, 2020 - the penalty will be the sum of:

  • interest on $1,000 from 4/15/19 to 4/15/20 plus
  • interest on another $1,000 from 6/15/19 to 4/15/20 plus
  • interest on the 3rd $1,000 from 9/15/19 to 4/15/20 plus
  • interest on the final $1,000 from 1/15/20 to 4/15/20

You can avoid this penalty if you're short less than $1,000 or if you're within the formulas mentioned by @Ashish Acharya .

When you have a W2 job, the most practical way to pre-pay taxes on your side business is NOT thru making these estimated payments, but thru adjusting your W2 paychecks. First, you estimate how much extra taxes you will owe - you can use various online estimating websites for that or, better yet, your accountant.

If you expect to owe $4,000, you go to your payroll department and ask them to withhold an extra $4,000 between now and the end of the year. They will calculate it per paycheck. 

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