Tax time is finally here after three months of delay. July 15th is the deadline for filing federal and most state and local taxes. But even though Tax Day is later than usual, many people are still behind, dealing with the fallout from a pandemic, racial injustice, and a faltering economy. Business owners, in particular, have a lot to catch up on, not just filing a return but paying first and second quarter estimated taxes. And while you can still get an extension on the first deadline, you can’t get one on the last two. Today I’ll cover what you need to know about paying your estimated taxes.
Do I need to make a payment?
As a self-employed person, you usually have to pay your taxes four times a year:
- April 15th for the period January 1 to March 31st
- June 15th for the period of April 1 to May 31st
- September 15th for the period of June 1 through August 31s
- January 15th (of the next year) for September 1st through December 31st
For each period, you estimate your income and all of the taxes you must pay including income, self-employment and any other applicable taxes.
You have to pay estimated payments if you’re an individual with a business structured either as a sole proprietorship, a partnership or an S Corporation and you expect to owe tax of $1,000 or more when you file your return. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. Keep in mind this is total tax owed after subtracting withholdings and credits.
I know that times are tough for a lot of small businesses, and you may not be making anywhere near what you were earning last year. Still if you’ve made any profit at all, you’ll want to calculate how much you may owe.
For one thing, if you don’t make your payments and you owe more than $1,000, you may have to pay a penalty. You can avoid the penalty if you paid at least 90% of the tax for 2020 or 100% of the tax shown on the return for 2019, whichever is smaller. If your adjusted gross income for the previous years was more than $150,000 per year (or $75,000 for married filing separately), then you have to pay 110% of what you paid in taxes the year before to avoid the penalty.
You can 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.
Lastly, keep in mind if you do end up owing a penalty, you can ask for a waiver based on “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.”
While the IRS has stated the penalties through July 15th would be waived due to Covid-19, it also stated interest, penalties and additions to tax with respect to such postponed Federal income tax payments will begin to accrue on July 16, 2020.
How to calculate your payment
When trying to figure out how much you owe, I always recommend that you or your tax professional estimate the tax you’ll owe through tax projections. The projections should account for:
- Total income including, net business income and other income such as wages, interest, dividends, etc.
- Above-the-line deductions found on your Schedule 1 like contributions to a Health Savings Account (line 12), deductible self-employment tax (line 14), contributions to your self-employed retirement accounts (line 15) and payments for your self-employed health insurance premiums (line 16)
- Your Standard Deduction or Itemized Deductions
- Any other credits (child tax credit) or deductions (Your Qualified Business Income deduction)
You should also make adjustments if you think your income may increase or decrease the second half of the year or you have large, lump-sum expenses at different points in the year.
If you need help with the calculation the IRS offers a worksheet Form 1040-ES and Form 1120-W for Corporations to figure your estimated tax. In addition, many of the tax preparation programs can perform these calculations for you. Either way, you need to estimate the amount of income you expect to earn for the year.
It may be helpful to use your income, deductions and credits for the prior year as a starting point. You’ll need that information anyway to make sure you hit the 100% or 110% “safe harbor” requirements.
I also like to use the previous year’s return to give my clients estimated percentages they can use on all income during the year. They can take the percentages of total tax to gross business income, for example 20%, and apply it to all income received throughout the year. I also have them put the money in a separate tax account, often not at the same bank, to prevent using the money before the quarterly payment is due. Then you can adjust up or down depending on what you calculate for the quarter.
Where to Pay
You can pay your tax through several methods:
- IRS Direct Pay. For online transfers directly from your checking or savings account at no cost to you, go to IRS.gov/Payments.
- Pay by Card. To pay by debit or credit card, go to IRS.gov/Payments. A convenience fee is charged by these service providers.
- Electronic Fund Withdrawal (EFW) is an integrated e-file/e-pay option offered when filing your federal taxes electronically using tax preparation software, through a tax professional, or the IRS at IRS.gov/Payments.
- IRS2Go is the mobile application of the IRS; you can access Direct Pay or Pay By Card by downloading the application
Corporations must use electronic funds transfer to make all federal tax deposits. This applies to deposits of employment, excise, and corporate income tax, as well as installment payments of estimated tax. Generally, electronic funds transfer is made using the Electronic Federal Tax Payment System (EFTPS). However, if the corporation does not want to use EFTPS, it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on its behalf
Hope that helps you prepare for the Wednesday’s deadline. One last thing: don’t forget you may have to pay state estimated taxes, too. Check your specific state for tax rates, deadline dates and penalties.