Make punctual contributions to IRS based on earnings
I will answer this question broadly for various jurisdictions, and also specifically for the US, given the OP's tax home: Generally, for any tax jurisdiction If your tax system relies on periodic prepayments through the year, and a final top-up/refund at the end of the year (ie: basically every country), you have 3 theoretical goals with how much you pre-pay: Specifically, for the U.S. All information gathered from here: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes. In short, depending on your circumstance, you may need to pay quarterly estimated tax payments to avoid penalties on April 15th. Even if you won't be penalized, you, may benefit from doing so anyway (to force yourself to save the money necessary by April 15th).  I have translated the general goals above, into US-specific advice:
Be ruthlessly meticulous about the IRS regulations for deducting a home office.  If it's allowed, it's allowed. "There are way too many details missing to be able to give you an accurate answer, and it would be too localized in terms of time & location anyway -- the rules change every year, and your local taxes make the answer useless to other people. Instead, here's how to figure out the answer for yourself. Use a tax estimate calculator to get a ballpark figure. (And keep in mind that these only provide estimates, because there are still a lot of variables that are only considered when you're actually filling out your real tax return.) There are a number of calculators if you search for something like ""tax estimator calculator"", some are more sophisticated than others. (Fair warning: I used several of these and they told me a range of $2k - $25k worth of taxes owed for a situation like yours.) Here's an estimator from TurboTax -- it's handy because it lets you enter business income. When I plug in $140K ($70 * 40 hours * 50 weeks) for business income in 2010, married filing jointly, no spouse income, and 4 dependents, I get $30K owed in federal taxes. (That doesn't include local taxes, any itemized deductions you might be eligible for, IRA deductions, etc. You may also be able to claim some expenses as business deductions that will reduce your taxable business income.) So you'd net $110K after taxes, or about $55/hour ($110k / 50 / 40). Of course, you could get an answer from the calculator, and Congress could change the rules midway through the year -- you might come out better or worse, depending on the nature of the rule changes... that's why I stress that it's an estimate. If you take the job, don't forget to make estimated tax payments! Edit: (some additional info) If you plan on doing this on an ongoing basis (i.e. you are going into business as a contractor for this line of work), there are some tax shelters that you can take advantage of. Most of these won't be worth doing if you are only going to be doing contract work for a short period of time (1-2 years). These may or may not all be applicable to you. And do your research into these areas before diving in, I'm just scratching the surface in the notes below." The purpose of making sure you met the safe harbor was to avoid the penalty. Having achieved that goal the tax law allows you to wait until April 15th to pay the balance. So do so.  Put enough money aside to make sure you can easily make that payment.  I was in this exact situation a few years ago. I planned my w4 to make the safe harbor, and then slept easy even though the house settlement was in May and I didn't have to make the IRS payment unti 11 months later in April. Very grey area. You can't pay them to run errands, mow the lawn, etc. I'd suggest that you would have to have self employment income (i.e. your own business) for you to justify the deduction. And then the work itself needs to be applicable to the business. I've commented here and elsewhere that I jumped on this when my daughter at age 12 started to have income from babysitting. I told her that in exchange for her taking the time to keep a notebook, listing the family paying her, the date, and amount paid, I'd make a deposit to a Roth IRA for her.  I've approaches taxes each year in a way that would be audit-compliant, i.e. a paper trail that covers any and all deductions, donations, etc. In the real world, the IRS isn't likely to audit someone for that Roth deposit, as there's little for them to recover. Your annual contributions are capped at the maximum of $5500 or your taxable income (wages, salary, tips, self employment income, alimony).  You pay taxes by the regular calculations on Form 1040 on your earned income.  In this scenario, you earn the income, pay taxes on the amount you earn, and put money in the Roth IRA.    The alternative, a Traditional IRA, up to certain income levels, allows you to put the amount you contribute on line 32 of Form 1040, which subtracts the Traditional IRA contribution amount from your Adjusted Gross Income (line 37) before tax is calculated on line 44.  In this scenario, you earn the income, put the money in the Traditional IRA, reduce your taxable income, and pay taxes on the reduced amount. By definition, this is a payroll deduction. There's no mechanism for you to tell the 401(k) administrator that a Jan-15 deposit is to be credited for 2016 instead of 2017. (As is common for IRAs where you do have the 'until tax time' option) If you are paid weekly, semi-monthly, or monthly, 12/31 is a Saturday this year and should leave no ambiguity about the date of your last check.  The only unknown for me if if one is paid bi-weekly, and has a check covering 12/25 - 1/7. Payroll/HR will need to answer whether that check is considered all in 2016, all in 2017 or split between the two. Assuming that what you want to do is to counter the capital gains tax on the short term and long term gains, and that doing so will avoid any underpayment penalties, it is relatively simple to do so. Figure out the tax on the capital gains by determining your tax bracket. Lets say 25% short term and 15% long term or (0.25x7K) + (0.15*8K) or $2950.  If you donate to charities an additional amount of items or money to cover that tax. So taking the numbers in step 1 divide by the marginal tax rate $2950/0.25 or $11,800.  Money is easier to donate because you will be contributing enough value that the IRS may ask for proof of the value, and that proof needs to be gathered either before the donation is given or at the time the donation is given. Also don't wait until December 31st, if you miss the deadline and the donation is counted for next year, the purpose will have been missed. Now if the goal is just to avoid the underpayment penalty, you have two other options.  The safe harbor is the easiest of the two to determine. Look at last years tax form. Look for the amount of tax you paid last year. Not what was withheld, but what you actually paid. If all your withholding this year, is greater than 110% of the total tax from last year, you have reached the safe harbor. There are a few more twists depending on AGI Special rules for farmers, fishermen, and higher income taxpayers.   If at least two-thirds of your gross income for tax year 2014 or 2015   is from farming or fishing, substitute 662/3% for 90% in (2a) under   the General rule, earlier. If your AGI for 2014 was more than $150,000   ($75,000 if your filing status for 2015 is married filing a separate   return), substitute 110% for 100% in (2b) under General rule ,   earlier. See Figure 4-A and Publication 505, chapter 2 for more   information. Just from my own experience (I am not an accountant): In addition to counting as 'business income' (1040 line 12 [1]) your $3000 (or whatever) will be subject to ~15% self-employment tax, on Schedule SE.  This carries to your 1040 line ~57, which is after all your 'adjustments to income', exemptions, and deductions - so, those don't reduce it.  Half of the 15% is deductible on line ~27, if you have enough taxable income for it to matter; but, in any case, you will owe at least 1/2 of the 15%, on top of your regular income tax. Your husband could deduct this payment as a business expense on Schedule C; but, if (AIUI) he will have a loss already, he'll get no benefit from this in the current year.   If you do count this as income to you, it will be FICA income; so, it will be credited to your Social Security account. Things outside my experience that might bear looking into:  I suspect the IRS has criteria to determine whether spousal payments are legit, or just gaming the tax system.  Even if your husband can't 'use' the loss this year, he may be able to apply it in the future, when/if he has net business income. [1] NB: Any tax form line numbers are as of the last I looked - they may be off by one or two. I do something pretty simple when figuring 1099 income.  I keep track of my income and deductible expenses on a spreadsheet.  Then I do total income - total expenses * .25. I keep that amount in a savings account ready to pay taxes.   Given that your estimates for the quarterly payments are low then expected, that amount should be more then enough to fully fund those payments.   If you are correct, and they are low, then really what does it matter?  You will have the money, in the bank, to pay what you actually owe to the IRS. Scenario: Ken contributes $20,000 in 2015 when the 402(g) limit is $18,000. Ken is not old enough to make catch-up contributions. Ken made $2,000 in excess deferrals which the plan must correct by refunding the excess and any allocable earnings. If the correction is made prior to April 15th, 2016: No penalty. The excess + earnings is refunded to Ken and basically becomes income. Ken will receive 2 1099-R's one for the excess deferral in 2015, and one for the allocable earnings in 2016. The refund is taxed at Ken's income tax rate. If the correction is made after April 15th, 2016: Double taxation! The excess contribution is taxable in 2015, and again in the year it is distributed. Allocable earnings are taxed in the year distributed. The excess + allocable earnings may also be subject to 10% early withdrawal penalty. The principal of the contribution can definitely be withdrawn tax-free and penalty-free. However, there is a section that makes me think that the earnings part may be subject to penalty in addition to tax. In Publication 590-A, under Traditional IRAs -> When Can You Withdraw or Use Assets? -> Contributions Returned Before Due Date of Return -> Early Distributions Tax, it says: The 10% additional tax on distributions made before you reach age 59½   does not apply to these tax-free withdrawals of your contributions.   However, the distribution of interest or other income must be reported   on Form 5329 and, unless the distribution qualifies as an exception to   the age 59½ rule, it will be subject to this tax. This section is only specifically about the return of contributions before the due date of return, not a general withdrawal (as you can see from the first sentence that the penalty doesn't apply to contributions, which wouldn't be true of general withdrawals). Therefore, the second sentence must be about the earnings part of the withdrawal that you must make together with the contribution part as part of the return of contributions before the due date of the return. If the penalty it is talking about is only about other types of withdrawals and doesn't apply to the earnings part of the return of contribution before the due date of the return, then this sentence wouldn't make sense as it's in a part that's only about return of contribution before the due date of the return. You elected to defer paying taxes by contributing to an IRA. Lawmakers simply want to make sure that they collect those taxes by requiring you to either withdraw the money (incurring a tax liability) or pay a penalty (tax). Yes you can.  This is known as a short selling against the box.  In the old days, this was used to delay a taxable event.  You could lock in a gain without triggering a taxable event.  Any loss on one side of the box would be offset by a loss on the other side, and vice versa.  However, the IRS clamped down on this, and you will realize the gain on your long position as soon as you go short on the other side.  See http://www.investopedia.com/terms/s/sellagainstthebox.asp. As to how to initiate the short cover, just transfer the long position to the same account as your short position and make sure your broker covers the short.  Should be relatively easy. "The heart of the question is: why can't Bill just pay whatever he owes based on his income in that quarter? If Q2 is gang busters, he'll increase his tax payment. Then if Q3 is surprisingly slow, he'll pay less than he paid in Q2. I think what's most interesting about this question is that the other answers are geared towards how a taxpayer is supposed to estimate taxes. But that's not my objective -- nor is it Bill's objective. My [his] real objective is:  In other words, the answer to this question either needs to deal with not overpaying, or it needs to deal with mitigating the underpayment penalty. AFAICT, there are 2 solutions: Solution 1 Figure your estimated taxes based on last year's tax. You won't owe a penalty if your withholding + estimated tax payments in each quarter are 25% or more of your previous year's tax liability. Here's the section that I am basing this on: http://www.irs.gov/publications/p505/ch04.html Minimum required each period.   You will owe a penalty for any 2011 payment period for which your estimated tax payment plus your withholding for the period and overpayments for previous periods was less than the smaller of: 22.5% of your 2011 tax, or 25% of your 2010 tax. (Your 2010 tax return must cover a 12-month period.) Solution 2 Use the ""Annualized Income Installment Method"". This is not a method for calculating estimated taxes, per se. It's actually a method for reducing or eliminating your underpayment penalty. It's also intended to assist tax payers with unpredictable incomes. If you did not receive your income evenly throughout the year (for example, your income from a shop you operated at a marina was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Emphasis added. In order to take advantage of this, you'll need to send in a Schedule AI at the end of the year along with a Form 2210. The downside to this is that you're basically racking up underpayment penalties throughout the year, then at the end of the year you're asking the IRS to rescind your penalty. The other risk is that you still pay estimated taxes on your Q2 - Q4 earnings in Q1, you just pay much less than 25%. So if you have a windfall later in the year, I think you could get burned on your Q1 underpayment." "You must have $x of taxable income that year in order to make a contribution of $x to IRA for that year. It doesn't matter where the actual ""money"" that you contribute comes from -- for tax purposes, all that matters is the total amount of taxable income and the total amount of contributions; how you move your money around or divide it up is irrelevant."