The Quarterly Estimated Tax Rip-Off (or: Two Weeks I Hate Twice a Year)

Today is September 15, which means I’m required by law to mail my quarterly estimated tax payments to my state and federal governments.  So I did.  I don’t like paying my taxes any more than the next guy, but I’m no scofflaw.  And I’m not going to use this as a jumping-off point for complaining about our lousy fiscal policy, or reciting my previous arguments about the need for fundamental tax reform.

There is something that bothers me about the June 15 and September 15 payments, though:  It bothers me that I’m required to pay taxes on money I haven’t earned yet. 

This happens because the “quarterly” deadlines actually short the second quarter, requiring a payment on June 15 instead of July 15.  That’s three months of taxes out of two months of income.  The third quarter is a full three-month quarter, which is better, but that still has me paying a total of nine months of taxes out of eight months of income.  The whole thing doesn’t get back on track until the fourth quarter, on which taxes are due January 15.

Consider Jones, for example, a self-employed single person earning $10,000 each month, and taking the standard deduction.  Jones would be required to pay roughly $9,270 on each of the four “quarterly” deadlines.  (This is not his full tax payment, mind you; it’s only what he’s required to make in order to avoid an underpayment penalty the following year — 90% in this example).  On April 15, leaving aside whether $9,270 out of $30,000 is too high or too low, it’s certainly fair enough to make Jones pay 25% of his estimated taxes on 25% of his income.  But on June 15, Jones has to pay another $9,270, even though he has only earned $20,000 since the last time he paid.  That’s almost half of Jones’s income for those months gone, just for the feds, and it’s not even his full tax burden.

Now Jones probably has monthly rent payments, monthly car payments, monthly grocery bills, monthly utility bills, and a whole lot of other regular monthly bills that don’t take a holiday just because the IRS wants a little extra from Jones on June 15 and September 15.  But that’s Jones’s problem, not the IRS’s.  Maybe he’ll just have to leave a higher balance on his credit card in June.  This is essentially a forced loan from Jones to the IRS: Jones must give the money to the government early and interest-free, even if he has to borrow it elsewhere.  And the loan stays in effect until January of the following year, when the IRS gives Jones a four-month “quarter” at the end of the year to catch up with the true quarterly schedules used in the reality-based community.

A few years ago, I thought I would try to find out why the non-reality based schedule was adopted, so I wrote my U.S. Representative, who was at that time Connie Morella.  She forwarded my inquiry to the IRS, which sent her back a letter stating that the IRS uses these irregular “quarterly” deadlines because Congress requires it.  But the IRS also denies that the deadlines require anyone to pay taxes on money he hasn’t yet earned.  I called the IRS directly this morning to see if this was still their position, and it is.  I find this disconcerting because it is a rare case in which the self-serving political baloney is actually mathematically wrong.

IRS representatives say that although Jones is allowed to pay his estimated taxes in four equal quarterly installments, he’s also allowed to use the “annualized” method, which is to calculate what he’s earned at the end of the “quarter” and base his tax payment on that amount.  Since the IRS’s screwy second “quarter” ends on May 31, and the third on August 31, they say Jones is only paying on the income he’s actually earned up to those dates.

But as the word “annualized” strongly suggests, and as the IRS’s own Publication 505 makes perfectly clear, the IRS requires Jones to pay estimated taxes based on his projected annual income.  It is true, as claimed by the IRS representatives who deny that this is taxation of unearned income, that the IRS worksheet for the “annualization” method uses May 31 and August 31 income figures as a starting point, but line 3 of this rather complicated formula requires Jones to use a multiplier that converts those figures into twelve-month figures — 2.4 × the May 31 income, or 1.5 × the August 31 income.  After that point, the tax calculation is based on Jones’s estimated annual income of $120k per year, and the actual amount Jones has earned by the time he pays his taxes no longer matters.

When I pressed this point on the phone with the IRS information specialist who fielded my call, she told me she couldn’t follow that math.  I tried to walk her through it, with “Well, 2.4 is the same as twelve-fifths, right?”  “I’m sorry,” she said, “I don’t do math that well.”  This, notwithstanding the fact that I had been transferred to the “Technical Department.”

The woman with whom I spoke today did have one very intriguing piece of information, though.  She told me that when she started with the IRS in 1979, she heard that the reason for the irregular quarters was that once upon a time Congress really needed to get more money in by mid-year, and the second quarterly payment was therefore set at June 15, where it has remained ever since.  Presumably, this would have been sometime in the far distant past when Congress actually cared about keeping the government in the black, or else the story is wholly implausible.  But I must say it has the ring of truth about it, precisely because it would be so spineless and gimmicky for Congress to coerce a loan from the taxpayers in this way.

Connie Morella went down to a well-earned defeat a few years back.  Maybe it’s time to let her successor take a shot at this question.  If any other Reasonable Minds can get straight answers from their Representatives, let us know.


One Response to “The Quarterly Estimated Tax Rip-Off (or: Two Weeks I Hate Twice a Year)”

  1. Timothy Peach Says:

    I’m expecting to pay significantly less taxes next year and just about every year going forward. That’s because I work on Wall Street right now, but there’s a good chance I’ll be working at a Gas ‘n’ Sip before the new president is sworn in.

    Being a parasite, I really have no reason to complain and I’m actually not complaining. I’m becoming more or less reconciled to the outcome by the moment — it’s really a drag hanging out in this karma cesspool.

    Selling this outcome at home will be difficult, but luckily we’re Catholic, where it’s still not accepted to love someone as long as your love shall last. And believe me, living on the minimum wage is going to have an impact on the durability of love.

    I just feel like my “tax problem” is bigger than yours. What do you think?

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