Hey guys, I've been trading for many years, but left my career job in 2015 to trade full time going forward as sole source of income. I already have Trader tax status for past 3 years along with MTM 475 election (yes you can work a job and have TTS) Anyway I've never been in a position where I needed to pay estimated taxes because I always had a W2 with 6 figure pay so it offset any taxes I would owe on a qtrly basis. With that said this year (2016) Anything I make is derived solely from my market gains. I am currently up $78,000 in Q1 with the first qtrly payment obv due April 18th. I'm thinking I do not want to pay the estimated taxes and would rather pay up one lump sum (plus interest and penalties) at the end of the year. I am trying to figure out a way to calculate the entire penalty cost by just basing it off of $250,000k per year goal and paying ZERO estimated taxes. Just assume for a second on the 250k I will owe a total of $87,000 in taxes for the year. If I let that 87k roll all the way to the end of the year and on April 15 2017 I pay the entire amount in 1 shot, what should I expect to owe in total penalties+int. Also does that mean I owe penalties on 12 months (full 2016 calendar year to Dec) or + 4 additional months if paying in April 2017? If thats the case I'll just pay it all upfront on December 31st 2016 and have 12 months worth of a penalty. Does this attached screenshot look accurate more or less? The dates are irrelevant I just put in 1 full year to gauge interest on 365 days. I'm just trying to gauge in what ball park is this entire fee going to be. This screenshot is calculating IRS interest only, but is there a separate failure to pay fee? I'm not sure if penalties are involved or if it's just an interest calc fee. If it only comes out to 3k or so I'm totally fine and happy to pay this amount instead of the hassle of every damn qtr. https://www.irscalculators.com/interest-calculator.php Thank you
If capital is not an issue, I would use an IRS work sheet or a program like Turbo tax to estimate what you actually owe and pay close to that each quarter from those trading profits each quarter. If trading capital is tight, hold back a little in a case the following quarters have losses. You can't get the overpaid tax back until tax time. This is what I did when I traded full time for myself. It gave me piece of mind.
You'll want to read and understand Form 2210: https://www.irs.gov/pub/irs-pdf/i2210.pdf https://www.irs.gov/pub/irs-pdf/f2210.pdf In the instructions pdf, under "Worksheet for Form 2210, Part IV, Section B—Figure the Penalty," it looks like the current penalty is 3%, but remember not all installments are required at the same time so the effective rate is lower than that. So suppose you made $250,000, and you paid no estimated taxes. Let's say your tax rate is 33% so you owe $82,500 in taxes. By my back of the envelope calculations, I am getting something like a $1,600 penalty which is approximately a 2% penalty if you pay no estimated taxes. Those forms aren't super clear, but if you wade through them awhile and do some examples, you'll see about how much you might pay in penalties.
If you day trade for a career, you have to pay taxes quarterly?? I am considering quitting my finance job and transition to a day-trader from my home. How come day traders have to pay taxes every quarter and get a penalty if they dont?
Everyone has to pay quarterly. If you have a "real job" your company should withhold taxes for you so you don't have to worry about it.