IRS quarterly tax payments

[Lambkin]

My tax preparer tells me that because my income went up a lot (due to employee stock option sales) I have to make quarterly payments toward next year's taxes. 100% of my income is on the W-2 (including the option proceeds). Perhaps I am misrepresenting what the guy said because I didn't really understand his explanation. My withholding matched my liability almost to the dollar. Maybe this betrays my ignorance but I always thought that if I manage to withhold the right amount, everything is cool with The Man. I tried to find something to read about this, but I didn't find anything that led me to believe I should make the quarterly pre-payments. How can I tell if I got bad advice about this?

Since I filed an extension and didn't promptly learn about the pre-payments, I am already behind on the payments. These payments are not really a burden to me, just another annoying obligation and I suspect that I will end up withholding too much for next year.

[Nikki]

Look at next year's return.

If your withholding (or deposit for future taxes) for this year is inadequate, you will have to pay an under-withholding penalty.

It's not too difficult to compute. The form 1040 and instructions contain specific details regarding withholding. However, it gets somewhat convoluted based on a huge number of factors.

Best thing to do is to run a pro-forma return for next year and look at the bottom line. If you owe too much, make a deposit this year to avoid the penalty. The worst thing that can happen is that you have too much on deposit and get a (non-interest) refund.

[Lambkin]

Well I guess better safe than sorry. This year my increased income was completely unplanned and the withholding worked out anyway with no effort by me. (I suppose because my employer withholds from the option sales as they do from salary?) For 2010, I have no idea if I will sell more options since it depends on the market so how would you do a pro-forma return with that uncertainty? I don't understand why I would end up with a different outcome for 2010 if the unplanned income has normal withholding, but I'd prefer to give the government a free loan rather than either paying a penalty or spending a lot of time thinking about it. I guess that's an argument for trusting the preparer even though I am too dumb to get it.

[jcolvin2]

From your question understand that the tax paid by withholding equalled or exceeded your income tax. Perhaps your preparer speculates that the withholding on your salary (or the exercise of stock options) will not be adequate in the future (perhaps some deductions available to you this year will disappear in the future). Another way to solve the (potential) problem would be to request that your employer slightly increase withholding.

[Judge Roy Bean]

You can always cook your books, play the delay game and hope they won't discover it.

That seems to be working for thousands of people, including the Chair of the House Ways and Means committee, but bear in mind you're not in that power strata so there may be consequences they don't face.

[LaVidaRoja]

As long as your current year's withholdings equal or exceed your prior year's tax, you are not required to make estimated payments. However, if your current year's tax is greater than your last year's tax, you are required to pay in the (approximate) difference by April 15th of next year, regardless of whether you receive an extension of time to file this year's taxes.