Question of the Week
Estimated Tax Day!
Happy Five-Minute Friday everyone!
I hope you had a good week. Today is the fourth quarter estimated tax deadline. Hopefully most of you are good to go. Just in case, I want to cover the who, how and why behind estimated payments.
Who needs to pay estimated tax payments?
You have to pay estimated payments if you’re an individual, including sole proprietors, partners and S Corporation shareholders and expect to owe tax of $1,000 or more when you file your return.
How do you figure out what you owe?
When trying to figure out how much you owe, I always recommend you, or your tax professional, estimating tax owed through tax projections. The projections should outline your gross business income, adjusted gross income, taxable income, taxes, deductions and credits for the year. You should also make adjustments for situations where your income may increase or decrease the second half of the year, you have large, lump sum expenses, and/or retirement contributions you may make.
I also like to give my clients percentages that they can use throughout the year based on their gross income. For example, I will have a client take 15% or 20% of every all income and put it in a tax account so the money is there and ready come time to pay the estimateds.
Where to pay them
You can send estimated tax payments with Form 1040-ES by mail and by phone. But I recommend, paying online, or from your phone using using IRS2Go app. If you’re paying online, don’t forget to specify that the payment is for period ending 12/31/2020, rather than the default 2021 period.
Pay at least something
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, you will avoid this penalty if you owe less than $1,000 in tax after subtracting their withholdings and credits, or if paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. You can learn more about the penalty in Publication 505, Tax Withholding and Estimated Tax.
There are also a few ways around to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax.
The penalty may also be waived if:
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
Quote of the Week
“I shall never use profanity except in discussing house rent and taxes.” – Mark Twain
Task of the Week
Get those estimateds in, if you haven’t! You still have a few hours.