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Estimated Tax Payments: How and When to Make Them

The coronavirus pandemic has created many challenges for individuals and business owners. Not only have our daily routines been upended, but also our financial well-being. Millions have been furloughed or laid off, and more than 100,000 small businesses have permanently shut their doors due to COVID-19. Many of those who remain employed or in business have also seen decreases in hours and income. To compensate, some people have reduced their withholding so they receive more money now. Others have turned to gig work to provide additional income. There are some, such as grocery and healthcare workers, who have seen an uptick in their income due to increased hours. These changes to your income can significantly impact your tax responsibilities. To ensure you are not surprised by an unexpected tax bill next year, consider making estimated tax payments.

What Are Estimated Tax Payments?

The IRS expects taxes to be paid as you earn or receive income throughout the year. This is typically done by withholding income tax from your paycheck or pension. In some cases, however, the amount may not be sufficient. You can increase your withholding to compensate or you can submit estimated tax payments to ensure you pay the required amount. Estimated tax payments are used to not only pay income taxes, but also other taxes, such as self-employment and alternative minimum tax. If you do not pay enough taxes through withholding or estimated tax payments, you may be charged a penalty.

Who Should Make Estimated Payments?

Do you receive income from alimony, investments, rentals, dividends, interest, self-employment, prizes, unemployment, or other sources where taxes were not withheld? Do you expect to owe more than $1,000 in federal taxes? If you answer “yes” to any of these scenarios, you should probably pay estimated taxes. Please note that there are special rules that apply to farmers and fishermen. Corporations should make payments if they expect to owe $500 or more in federal taxes.

You won’t be required to make estimated payments if you meet all three of the following conditions:

  • You were a U.S. citizen or resident for the entire year
  • Your prior tax year covered 12 months
  • You had zero tax liability for the prior year or you weren’t required to file an income tax return

Still not sure if you should make payments? The IRS has a free tool to help you determine if you are required to make estimated tax payments. It takes approximately 15 minutes to complete and you’ll need a copy of your 2019 tax return, as well as an estimate of your 2020 income.

How to Determine Your Estimated Tax Payment Amount

Once you’ve determined that you should make estimated tax payments, you’ll need to use Form 1040-ES to figure your estimated tax. It may be helpful to use last year’s income, deductions, and credits as a starting point. If you applied your 2019 tax refund to your 2020 taxes, be sure to consider that, as well. It’s important to be as accurate as possible when estimating your income to avoid potential penalties. The safest way to avoid an underpayment penalty is to pay at least 100% of last year’s taxes., unless you’re adjusted gross income was above $75,000 (single or married filing separately) or $150,000 (married filing jointly), in which case you’ll want to pay 110 percent of your previous year’s taxes. Not confident about your calculations? It may be a good idea to use tax software or enlist the help of a tax professional.

When & How to Make Estimated Tax Payments

Estimated tax payments are typically submitted every quarter. Due to the pandemic, however, the IRS adjusted its estimated tax payment deadlines for this year. The next payment is due September 15 (for income earned between June 1 and August 31), and the final payment for 2020 is due on January 15, 2021 (for income earned between September 1 and December 31). You can, however, make payments more often than four times a year. If it’s more manageable, feel free to submit monthly or even daily, if desired.  

The IRS accepts estimated tax payments through a variety of different methods, including:

For cash payments, you must first register online at www.officialpayments.com/fed and there is a maximum of $1,000 per day per transaction allowed. If paying by check or money order, be sure to include the payment voucher provided in Form 1040-ES, and send the payment to the address that corresponds to your state.  

Although the IRS is likely to be more lenient this year due to the pandemic, don’t run the risk of getting hit with penalties by failing to make your estimated tax payments on time. If you need help determining your estimated tax payments or getting caught up with back taxes, contact the tax professionals at Tax Defense Network. We’ll help you work out a payment schedule that fits your budget and keeps you on track.