For millions of small businesses and freelancers every year, estimated tax payments are a year-round aspect of their tax payments.
Most people don’t have to deal with those changes, but small businesses and some individuals will have to pay these taxes throughout the year.
In this short blog, we’ll give you a crash course in estimated tax payments so you can stay on top of it this year.
Estimated Tax Payments: What Are They?
Estimated tax is tax collection on the income that is not subject to withholding. Think certain income, self-employment, alimony, rent, interest, dividends, etc. This typically applies to small businesses and self-employment, among other special employment/income situations.
Generally, taxpayers need to pay at least 90% of their taxes through a combination of withholding or estimated tax. Underpaying (or paying late) can lead to being financially penalized by the IRS.
In 2020, estimated taxes are due quarterly, specifically on these dates:
- April 15th
- June 15th
- September 15th
- January 15th, following year
If your fiscal year doesn’t start on Jan. 1, the payment schedule would be the 15th day of the 4th, 6th, 9th, and 1st month of the fiscal year.
Do I Need To Pay Estimated Tax?
S corporation shareholders, partners, and individuals (including sole proprietors) will usually need to pay estimated tax if they expect to owe $1000 or more after filing their return. For corporations, the threshold is held at $500.
According to the IRS, you will not have to pay estimated tax if all three of the below criteria are met:
- You had no tax liability for the prior year
- You were a U.S citizen or resident for the whole year
- Your prior tax year covered a 12-month period
If you have withholding and refundable credits but they are less than (a) 90% of the tax on your 2019 return or (b) 100% of the tax shown on your 2018 tax return (whichever amount is smaller), you will need to pay estimated tax.
For more clarification, we can help you determine if you should be paying estimated tax.
Special Circumstances
Like most aspects of the tax system, there are special circumstances for certain individuals/businesses. For farmers, fishermen, and individuals with a relatively high income, the IRS has a great explanation for how their estimated taxes will be different.
I Underpaid On My Estimated Tax Payment! What Now?
As we mentioned earlier, underpaying on your estimated tax payments will result in a financial penalty. Even if you expect a refund from your tax return, your estimated tax payment still must be on time. However, under certain conditions, you can have the estimated tax payment waived.
If you missed a payment because of some sort of disaster or tragic event (e.g. a devastating hurricane), the IRS may waive the estimated tax and grant an extension if you submit proof.
Additionally, retiring or becoming disabled in some fashion during the tax year would also be a reason the IRS may grant a waiver. The key is to prove that the missed/underpayment was reasonable, and not due to “willful neglect.”
If you do not fall under either of these circumstances, then a penalty waiver is still an option to avoid the penalty if the threshold was narrowly missed. Give us a call to learn more about the estimated tax penalty waiver and to have one filed for you.
How Do I Calculate My Estimated Tax?
Depending on your specific situation, the IRS has a number of forms that could help. These forms are separated for individuals or corporations, so you can determine how your taxes will look roughly. There are also several example calculations on their website to use as a guide.
However, working with dedicated tax experts is the best way to ensure your taxes are paid correctly. Estimated tax payments can be tricky, especially if you or your business receive income unevenly over the course of the year. An expert can ensure it’s filed correctly and doesn’t result in a penalty.
Get Your Estimated Tax Payments Done With Biel!
Biel Fisette Iacono, LLP is prepared to help with your estimated tax payments, along with a full suite of accounting, investing, and wealth management services. Give us a call or visit our office to get started!