Some events repeat each year in early October. The first cool weather arrives. Baseball season ends, at least in Chicago. My office bustles as certain clients finally bring in the necessary information to complete their income tax returns for the previous year before the last possible extension expires on Oct. 15.

Denial can be a powerful motivator of delay, so a disproportionate number of these last-last-last minute filers owe money on their federal or state taxes. They are variously confused, perplexed, frustrated, angry, uncomprehending, broke—or any combination of these states. I spend a good bit of time discussing why they owe, payment options, what they should have done differently last year, and what they should be doing differently now. Some need to be reassured that they will not go to prison for owing money they cannot immediately pay.

Why Withholding Is Imperfect.

What these folks all have in common is that the taxes withheld from their paychecks are not sufficient to cover their tax bill for the year. This can happen for many reasons, and, indeed, coming out even is as often a matter of luck as of planning.

With federal taxes, the most common problem is having lots of employers. The withholding tables assume that an employee will receive the same compensation each pay period, and that there is no significant other income in the household. As a practical matter, they lack information to do anything else. If you have multiple employers, each is calculating tax using the standard deduction and personal exemption, along with the lower steps on the tax rates (10 percent on the first $X, then 15 percent on the next $Y, and so on). Of course, you actually only get one of each. Suppose you have a civilian job which puts you in the middle of the 15 percent bracket. And suppose you worked at a bottom-tier-Equity-contract theatre which paid you so little that you would have no income tax if it were your only income. When the theatre paid you, no tax would be withheld. When the income is added together, the effective rate on the theatre income is a flat 15 percent, and you would owe money. In this two-employer example, the bill would only be a few hundred dollars. If five or eight or ten employers were involved, each paying at a poverty rate but adding up to a serious adult income, the debt could easily be in the thousands.

With state taxes, withholding is most often inadequate when several states are involved. State income tax is withheld for the state where you work, not where you live. Normally, both the work state and your resident state tax the income, and your resident state gives you a credit for the tax paid the work state. This would balance perfectly if every state a)had an income tax, b)at the same rate, and c)calculated the same way with the same adjustments, exclusions, deductions and special provisions. The reality is somewhat different. I just completed the tax returns for a client who was on a national tour in 2003. He worked in 11 states, not including Illinois, where he lives. Of the 11, three have no income tax, two have reciprocal agreements with Illinois not to tax wages of each other's residents, and two others do not bother to try to collect taxes from touring actors. Result: not much credit for tax paid other states, a tax bill to Illinois, and a penalty for not having paid the taxes earlier.

And, of course, self-employed people have no taxes withheld.

You Should Have Thought About That Before We Left Home

Your employers may not know your entire tax situation, but tax authorities presume that you do. Those who will not have enough paid in through withholding are required to make quarterly estimated tax payments, starting on April 15. If you do not, they will charge you a penalty. The federal penalty is calculated exactly like interest, from the date you should have made the actual tax payment to when you did pay the tax, or the original due date of the tax return (whichever is earlier). The rate varies with the interest rate on Treasury securities, and is currently 4 percent. Some states follow the federal rules, while others (Illinois among them) see the penalty as a revenue opportunity. Illinois's penalty is only 2 percent if the payment is under a month late, but quickly escalates to 20 percent of the underpaid tax. Ouch.

"Enough"—as in "having paid enough to avoid a penalty"—has multiple definitions, all recognizing that estimates are just that. If you have paid in 90 percent of your actual taxes through any combination of withholding and estimate payments, there is no penalty. Nor is there a penalty if you owe less than $1,000 in federal taxes or $250 in Illinois taxes. And there is no penalty if you have paid an amount equal to 100 percent of the preceding year's taxes (110 percent for high-income taxpayers).

Making estimated tax payments equal to the preceding year's taxes works great for people whose incomes are stable or consistently increasing. For those whose income may go down, or whose income is earned at irregular intervals (sounds like you?), it is impractical because they may not have the money to make these payments on time, and their actual taxes may be lower. Textbook theory says that these folks should calculate their cumulative income and deductions four times a year, and calculate something close to their true liability. A few of my clients have situations complex enough to require that. For most, though, the pattern of income and deductions does not change from year to year, only the amounts and timing. I can generally calculate rough rule-of-thumb percentages to use: multiply your income during the period by this percentage, and pay it in. This is not perfect, but it almost always keeps them within the 90 percent criterion.

Assuming, of course, that they actually pay the calculated amounts, and do so on time.

Are there money or tax questions you would like to see discussed in this column? Let me know at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also has been known to produce theatre.

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