When you receive a regular salary, your employer makes sure that Uncle Sam gets his share of every paycheck you receive by withholding taxes and sending it to the IRS. But if you’re self-employed or have non-wage income, you’ll most likely have to put money aside and pay estimated taxes four times a year.
What are the estimated taxes?
Income not affected by federal withholding tax throughout the year is still subject to other tax payments. These payments are tracked and paid through estimated taxes, which must be paid as income is earned during the year.
However, taxpayers are sometimes able to circumvent the payments by having more taxes withheld from their paychecks. Penalties and interest generally apply for underpayments and late payments.
The following are examples of income that is not normally subject to withholding tax:
- Capital gains.
- Earnings from self-employment.
- Earnings from the gig economy.
- Unemployment benefits.
- Social security benefits in certain cases.
The IRS wants Americans to pay taxes as they make money. Normally, penalties and interest apply for underpayments and late payments.
Due to the 2020 pandemic, some tax filing deadlines have been relaxed and extended. Likewise, interest and penalties were waived and did not begin to accrue until mid-July.
“Keep in mind that due to COVID-19, the 1040 filings for 2019 have been moved from April 15 to July 15,” says Judy O’Connor of accounting firm O’Connor & Rodriguez, PA, in Miami Shores. , in Florida. “And then, due to COVID, the first two quarterly payments for estimated taxes were moved from April 15 and June 15 to July 15.”
But “at this time” there are no changes planned for the 2021 tax year due to the pandemic, she adds. But that could change. “There’s still so much up in the air with COVID-19, and there could be changes again.”
Who has to pay the estimated taxes?
If you expect to owe more than $1,000 in additional taxes after calculating your withholding and refundable credits for the year, the IRS says you owe estimated taxes. Note that special rules apply for farmers and fishermen.
The IRS, however, offers safe harbor guidelines to help you avoid underpayment penalties. For example, you’re safe if your deductions pay 90% of the tax bill you’ll owe for 2021. But if you have no idea how much you’ll earn next year, you can pay 100% of your tax of 2020. invoice to protect you against penalties and interest due.
When are estimated taxes due?
The estimated upcoming deadlines for filing tax returns are as follows:
|Estimated tax due:||For income received:|
|January 15, 2021||September 1 – December 31, 2020|
|April 15, 2021||January 1 – March 31, 2021|
|June 15, 2021||April 1 – May 31, 2021|
|September 15, 2021||June 1 – August 31, 2021|
|January 18, 2022||September 1 – December 31, 2021|
The deadline for the fourth quarter is always in January of the following year.
Normally, the estimated tax due date falls on the 15th of the month. When this date falls on a weekend or federal holiday, the 1040-ES filing deadline is extended to the next business day. This happens in 2022, when January 15 falls on a Saturday, followed by Martin Luther King Jr. Day on Monday, January 17. Thus, the tax deadline for income earned in the fourth quarter of 2021 is Tuesday, January 18, 2022.
How to determine what to pay
Form 1040-ES helps you calculate your estimated taxes and provides supporting documents to send with your estimated tax amounts if you choose to pay by check or money order. Tax preparation software or your accountant can do the calculations for you. To determine how much you owe, check the income claimed and deductions taken on the previous year’s federal tax return to see if it will be comparable in the current year.
Don’t forget to check if you’ve applied your previous year’s tax refund to this year’s taxes.
High earners, defined as those earning $150,000 or more if single or married file jointly ($75,000 if married file separately), should pay 110% of tax owing last year to comply with safe harbor rules.
Example: If your tax bill last year was $30,000, this year you would pay $33,000 (10% more) in estimated taxes and withholding taxes to avoid paying underpayment penalties .
How to pay estimated taxes
Ideally, the IRS would like to get your estimated taxes in four equal installments over the year, but some businesses are seasonal. For example, a landscaping company makes most of its money during the warmer months of the year. It is wise to pay tax as you earn income. In this case, you will follow the annualized income laddering method which allows you to pay when you run out of money. The instructions are in IRS Publication 505tax withholding and tax estimate and Form 2210.
Once you have determined how much to pay, the IRS will accept your money in several ways. Payment instructions are available at IRS.gov/payments. Payment methods include:
- Direct payment from your current or savings account.
- The IRS2Go mobile application (IRS2Go is available in the App Store or on Google Play.)
- Payment by debit or credit card.
- Use of the electronic federal tax payment system.
- Transfer the same day via your bank.
- Cash at a participating retail location.
If you are paying online, which you can do at any time of the year, be sure to select the tax year and tax type or form associated with your payment. If paying by check or money order, send payment along with a Form 1040-ES voucher to the address listed for your state or territory on this form. Make the check payable to the United States Treasury and, in the notes section in the lower left corner, specify the tax year and “estimated taxes.” Whichever way you pay, it’s important to be thorough and make sure the information you provide is accurate.
Taxpayers who live in locations subject to natural disasters should note that changes are likely to be made regarding the quarterly due dates for estimated tax payments. A list of applicable declared disaster situations can be found on the IRS website.