Question of the Week
What happens if I missed Estimated Tax Day?
Happy Friday, everyone! I hope you had a good week.
Tax season is almost in full effect. The IRS announced that filing season opens on Monday, January 23rd. They expect more than 168 Million returns.
But you business owners had a deadline earlier this week – the 4th quarter estimated tax payment deadline, which was January 17th.
Did you miss the deadline? That’s alright; you still have time to get the payment in. You’ll just incur a penalty (more on that below).
And as a review, I wanted to go back over the who, how, and why behind estimated payments, as well as some hacks you can use to calculate your payment
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 figuring out how much you owe, I recommend that you or your tax professional estimate the 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 in the second half of the year, you have significant lump-sum expenses, and retirement contributions you may make.
I also like to give my clients percentages they can use throughout the year based on their gross income. So, for example, I will have a client take 15% or 20% of all income and put it in a tax account so the money is there and ready come time to pay the estimateds.
Worst case scenario, if you’re pressed for time, you can apply the “safe harbor rule,” which helps you avoid the estimated tax penalty if you pay 100% of the taxes you owed on the prior year’s return (2021 for our purposes). So you can divide your tax liability from 2021 by four and make that payment to help keep you covered. That percentage increases to 110% if your income is over $150,000 annually.
The safe harbor method doesn’t account for any differences between the years, so again, make sure you adjust accordingly by the end of the year.
Where to pay them
You can send estimated tax payments with Form 1040-ES by mail and phone. But I recommend paying online, or from your phone using the IRS2Go app. If you’re paying online, don’t forget to specify that the payment is for the period ending for the 2nd Quarter of 2022.
And don’t forget you should also pay your state-estimated taxes. All states offer online portals to make payments, so take advantage of those.
Pay at least something
Suppose you don’t pay enough tax throughout the year, either through withholding or making estimated tax payments. In that case, you may have to pay the penalty for underpayment of the estimated tax. That penalty is .5% (or .005) of what you owe.
Generally, you will avoid this penalty if you owe less than $1,000 in tax after subtracting their withholdings and credits or if you 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 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 an,d 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 don’t need time. What I need is a deadline.” – Duke Ellington
Task of the Week
If you haven’t already, get those estimated payments in. And remember, you don’t have to wait until the deadline to make the payment.