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Let's say I expect to generate $500/month of steady income from my side company (single member LLC). I work FT during the day and taxes are paid accordingly. Do I need to worry about estimated taxes, assuming my withholdings are reasonable (S1)?

What happens if I don't file my estimated taxes?

EDIT: I live in the US and recently got married. My wife's W4 is S0 while I'm M1. I may change mine to M0 to offset her large refund.

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3 Answers

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No. If you are employed, and your employer is withholding enough taxes to account for all of your income, you do not have to file estimated taxes.

If your employer is currently not withholding enough, all you have to do is file IRS Form W-4 with your employer to increase the amount they withhold.

This is assuming you are in the US.

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You haven't indicated if you live in the US, as Zuly noted, so I too am assuming this.

If you wind up owing more than $1,000 in taxes, you have not withheld enough and are subject to penalty: (Source: IRS Website).

So the question is, how close is your withholding to your actual tax liability? If every year you get a refund of $1,000 and you're in the 28% tax bracket, you don't need to worry about prepayment on an extra $6,000/yr of income. But if you're in a 28% tax bracket, and you pay $1,000 every year when you mail your tax return, then you should be looking into making quarterly payments (of, say, $400).

You can read about how to make quarterly payments by looking into the 1040 ES. This will become more important as your side income grows, which hopefully it will!

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Every year I get a refund of less than $1,000. I'm making $77k but I did recently get marry. My wife is at 67k and she gets a little more than $1k back every year. At the moment, her withholdings are S0 while mine are M1 (mistake on my part when filling out my W4). I may lower it to M0 or maybe M but withhold at Single rate. – luckytaxi May 3 '12 at 12:51
They tend to give you some grace the first year, and it looks like you're close enough that you may be ok. But review your return next year carefully, and do it as early as possible so you'll know whether you should be making estimated payments, and if so can make the April 2013 payment for 1Q taxes. – Scott Wilson May 3 '12 at 12:54
Got it, in general when two spouses are working FT jobs, is it always a safe bet to have one person withhold more and the other withhold lesser? Forget side businesses, I'm just wonder what the case would be for us if my side business doesn't generate any income. – luckytaxi May 3 '12 at 13:03
I'm sorry, but I disagree with this advice. There is no need to go through the ordeal of filing estimated taxes with the IRS if your employer is already withholding taxes for you. If you believe that your employer is not withholding enough to account for your other income all you have to do is file Form W-4 to increase that amount. This option is MUCH easier than filing estimated taxes. Also note, that this applies to both federal and state. The $1000 is a federal limit. The state limit may or may not be the same. – Zuly Gonzalez♦ May 3 '12 at 13:37
@ZulyGonzalez Agreed for small amounts, but as the OP's side business income increases, this is not sustainable. Imagine his HR department's reaction when he asks that his withholding be increased $1,000 per month! :) – Scott Wilson May 3 '12 at 13:40
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You are employed and holding a side business. Have you looked into potential conflict of interests? Your employer can potentially claim IP developed at your side business without the legal aspects resolved.

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yep, im selling hot dogs and working in IT. – luckytaxi May 4 '12 at 17:32

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