My cousin earned around $50k last year and never withheld a cent.

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How much trouble is she in? 

Up until late 2015 she had a regular W2 job, then in January of last year she got hired in a hair salon and immediately did very well, but apparently they set their people up as independent contractors and "nobody ever told her she needed to make tax payments". Fast forward to today and she's suddenly had this realization that she never made any kind of estimated tax payment. Pings me saying "what do I do?!" since I have my financial world semi-together.

She just got a 0% on purchases cc so I'm thinking she makes a best-guess payment on her federal and state (CA) liability, file for an extension, and then find a CPA to figure out what she actually owes once the dust settles.  Thoughts?  I know she'll get hammered for not making estimated payments quarterly but if she covers her liability that will at least stop the bleeding, am I right?  Assuming a $50k income last year, what's the best way to determine an amount to pay?  What if she just pays 110% of her previous year's liability, would that let her be safe harbored?  I guess not since that only protects someone up until midnight tonight?

Thanks for any help with my frantic family member - this will probably be an expensive but needed lesson.

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nothing. There's a penalty of like 4-6% , and I don't think she even has to pay that since it's the first year.

You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they've mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.

I would also have her make her 1st quarter estimated payment for 2017. It must be postmarked by tonight 4/18/2017.

protomenace said:   You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they're mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.
If she's classified as an independent contractor, she may also be on the hook for the full 12.4% for SS and 2.8% for Medicare tax.
At her income, safe harbor is 100% of last year's taxes.
ETA: stanolshefski pointed out that safe harbor does not appear to apply in this situation.

She should consider doing a short calculation on some site like TurboTax. com which she can do on line. TurboTax. com has a link to register the tax extension on line. She should NOT use TurboTax. com system to make the payment. Select Other where it offers to handle the payment.

It looks like Pay1040.com is cheapest way to pay with that credit card.  SEPARATELY she can do her 2017 estimated tax payment with pay1040.com being careful each payment indicates 2016 tax deposit  or 2017 Estimated payment.  They will handle the 2014 quarter estimated paperwork filing.

State income tax is another matter. 

https://www.mastercard.us/en-us/consumers/get-support/pay-taxes/...

https://www.pay1040.com/

BostonOne said:   
protomenace said:   You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they're mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.
If she's classified as an independent contractor, she may also be on the hook for the full 12.4% for SS and 2.8% for Medicare tax.
At her income, safe harbor is 100% of last year's taxes.

  Except safe harbor wouldn't apply to this situation. She could try to request a waiver of the underpayment penalty due to "unusual circumstance":

https://www.irs.gov/pub/irs-pdf/i2210.pdf

You might be able to get the IRS to accept being a first-time independent contractor as a reason to not pay the penalty

stanolshefski said:   
BostonOne said:   
protomenace said:   You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they're mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.
If she's classified as an independent contractor, she may also be on the hook for the full 12.4% for SS and 2.8% for Medicare tax.
At her income, safe harbor is 100% of last year's taxes.

  Except safe harbor wouldn't apply to this situation. She could try to request a waiver of the underpayment penalty due to "unusual circumstance":

https://www.irs.gov/pub/irs-pdf/i2210.pdf

You might be able to get the IRS to accept being a first-time independent contractor as a reason to not pay the penalty

  Good point. Since it wasn't quarterly or withholding, safe harbor doesn't apply even if she wrote a check for 100% today, correct?

stanolshefski said:   
BostonOne said:   
protomenace said:   You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they're mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.
If she's classified as an independent contractor, she may also be on the hook for the full 12.4% for SS and 2.8% for Medicare tax.
At her income, safe harbor is 100% of last year's taxes.

  Except safe harbor wouldn't apply to this situation. She could try to request a waiver of the underpayment penalty due to "unusual circumstance":

https://www.irs.gov/pub/irs-pdf/i2210.pdf

You might be able to get the IRS to accept being a first-time independent contractor as a reason to not pay the penalty

  
This is great info, thanks.  Quick search tells me the IRS will often waive the penalty for a first-time 1099-misc.

Holy crap I didn't realize she'd have to pay fica as well, and I especially didn't know fica was so much ... I figured if she could scrape up $10k in expenses she'd reduce her taxable to $45k and liability to $4700 federal and $1300 state according to a couple calculators I found online.  Adding fica adds another $3400 to that figure!  Yikes... 

Fortunately she's been steadily contributing to a Roth which has exploded in the last year or so.  Looks like she may need to raid some of her contributions to that vehicle to pay the piper.

I had to pay an underpayment penalty for the first time this year. I thought I was good under the safe harbor, but didnt realize that the withholdings have to be 110% of 2015 taxes for higher income groups instead of 100%.

My underpayment penalty was only $34, though, so I'm not too upset about it.

Since she's a 1099-MISC contractor, she'll have a lot more freedom to claim deductions as well. I don't want to steer her in the wrong direction, so I won't offer specific advice for her industry, but working in IT, I often claim equipment that I personally use (laptops, etc.), car expenses, home office expenses, etc.

If she has to pay for a spot in the salon as well (which I've heard is common), she likely can claim that on her taxes as well, amongst other things (if she buys her own products, scissors, blow dryers, whatever else). That should help to reduce her tax burden, potentially quite a bit.

Late filing penalties are steep (5% per month, 25% max) and failure to pay penalties are on top of that. The extension needs to be filed TODAY to avoid failure to file penalties. She should also pay whatever she can ASAP to minimize failure to pay penalties (0.5% per month). Note that the failure to pay penalty, which is for not paying your taxes by the filing deadline, is not the same as underpayment penalties calculated on the 1040 itself. If you don't have enough withholding or estimated payments during the tax year but pay the tax by the filing deadline, you have underpayment penalties that are essentially just (fairly low rate) interest. Failure to pay penalties for not paying by 4/15 (or 4/18) are more punitive.

How much of that $50K earnings was paid in cash?

This came up on April 18th? I think she's a little late to the party.

highstatuspol said:   
stanolshefski said:   
BostonOne said:   
protomenace said:   You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they're mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.
If she's classified as an independent contractor, she may also be on the hook for the full 12.4% for SS and 2.8% for Medicare tax.
At her income, safe harbor is 100% of last year's taxes.

  Except safe harbor wouldn't apply to this situation. She could try to request a waiver of the underpayment penalty due to "unusual circumstance":

https://www.irs.gov/pub/irs-pdf/i2210.pdf 

You might be able to get the IRS to accept being a first-time independent contractor as a reason to not pay the penalty

  
This is great info, thanks.  Quick search tells me the IRS will often waive the penalty for a first-time 1099-misc.

Holy crap I didn't realize she'd have to pay fica as well, and I especially didn't know fica was so much ... I figured if she could scrape up $10k in expenses she'd reduce her taxable to $45k and liability to $4700 federal and $1300 state according to a couple calculators I found online.  Adding fica adds another $3400 to that figure!  Yikes... 

Fortunately she's been steadily contributing to a Roth which has exploded in the last year or so.  Looks like she may need to raid some of her contributions to that vehicle to pay the piper.

  
It makes more sense to just pay the IRS over time versus robbing an IRA.  The interest isn't that bad and you are already on the hook for the penalties regardless at this point.  

The IRS is quite used to people taking a while to pay up.   Just send them a bone (payment) every so often and they will just growl in the corner until you toss them another one. 

I had an underpayment penalty this year as my 1099 income went up dramatically. It was $105 and I just cashed the refund check from the IRS the other day. I think you get a reprieve the first time around.

lotusgardener said:   I had an underpayment penalty this year as my 1099 income went up dramatically. It was $105 and I just cashed the refund check from the IRS the other day. I think you get a reprieve the first time around.
  You underpaid, but got a refund?

Glitch99 said:   
lotusgardener said:   I had an underpayment penalty this year as my 1099 income went up dramatically. It was $105 and I just cashed the refund check from the IRS the other day. I think you get a reprieve the first time around.
  You underpaid, but got a refund?

  
Can happen, if you didn't make estimated tax payments until late in the year, for example. 

highstatuspol said:   
stanolshefski said:   
BostonOne said:   
protomenace said:   You should also look into whether your cousin has been illegally misclassified as an independent contractor. I'm not 100% sure about what qualifies you one way or the other, but if they're mischaracterized her they're basically stealing half of her payroll taxes and potentially not providing appropriate benefits for a W2 employee.
If she's classified as an independent contractor, she may also be on the hook for the full 12.4% for SS and 2.8% for Medicare tax.
At her income, safe harbor is 100% of last year's taxes.

  Except safe harbor wouldn't apply to this situation. She could try to request a waiver of the underpayment penalty due to "unusual circumstance":

https://www.irs.gov/pub/irs-pdf/i2210.pdf 

You might be able to get the IRS to accept being a first-time independent contractor as a reason to not pay the penalty

  
This is great info, thanks.  Quick search tells me the IRS will often waive the penalty for a first-time 1099-misc.

Holy crap I didn't realize she'd have to pay fica as well, and I especially didn't know fica was so much ... I figured if she could scrape up $10k in expenses she'd reduce her taxable to $45k and liability to $4700 federal and $1300 state according to a couple calculators I found online.  Adding fica adds another $3400 to that figure!  Yikes... 

Fortunately she's been steadily contributing to a Roth which has exploded in the last year or so.  Looks like she may need to raid some of her contributions to that vehicle to pay the piper.

 More than half of taxpayers pay no income tax, but most pay fica.  I just wrote all my checks yesterday - self employed - paid 10X in Fica what I paid in income tax. 

Glitch99 said:   
lotusgardener said:   I had an underpayment penalty this year as my 1099 income went up dramatically. It was $105 and I just cashed the refund check from the IRS the other day. I think you get a reprieve the first time around.
  You underpaid, but got a refund?

  Can happen if you do estimated payments but back load your payments relative to your income.  Harder to do with withholdings.

JepJepJep said:   I would also have her make her 1st quarter estimated payment for 2017. It must be postmarked by tonight 4/18/2017.
It's due,4/18, and I believe, therefore, is supposed to be postmarked (or submitted online) by 4/18, but if she failed to do it by that date, she can still do it after the date, which may cause her to wind up owing interest and penalties calculated based on how late she submits it, the sooner the better, which is better and cheaper than not submitting the payment at all.



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