The coronavirus has affected every aspect of our lives – including our tax responsibilities. Not only has the annual filing deadline for 2019 taxes been extended to July 15 – so has the deadline for the first payment of quarterly estimated taxes, which is also ordinarily due on April 15. But these are extraordinary times.
“The government recognizes that individuals and businesses who are dealing with the coronavirus need assistance with not only time to file, but also to pay,” says Judy O’Connor of O’Connor & Rodriguez, PA in Miami Shores, Florida.
What are estimated taxes?
Income received that is not subject to federal tax withholding during the course of the year is subject to tax, requiring taxpayers to pay estimated taxes on a quarterly basis. One way around this for wage earners is to increase the amount you withhold at your regular job.
Examples of income not normally subject to tax withholding include:
- Capital gains.
- Self-employment earnings.
- Gig economy earnings.
- Unemployment compensation.
- Social Security benefits in some cases.
The IRS wants Americans to pay taxes as they earn money. Normally, penalties and interest apply for underpayments and late payments. However, this year penalties and interest are waived and won’t begin accruing until after the July 15 deadline.
Self-employed individuals get an additional refundable tax break, thanks to the Families First Coronavirus Response Act, signed into law on March 18. The law enables employees to get paid time off if they are quarantined or experiencing COVID-19 symptoms, or if they need to stay home to care for a child whose school or daycare is closed.
“Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances,” according to an IRS news release. “These credits will be claimed on their income tax return and will reduce estimated tax payments.” The details are being worked out, according to IRS Spokesman Eric Smith.
Ordinarily, the estimated tax filing deadlines are as follows:
- April 15, 2020.
- June 15, 2020.
- September 15, 2020.
- January 15, 2021.
When these dates fall on a weekend or federal holiday, the 1040-ES filing deadline is pushed to the following business day.
For 2020, both the first and second estimated tax payments are due on July 15, while the other due dates still apply.
How to determine if you need to pay estimated taxes
If you expect to owe more than $1,000 in taxes after calculating your withholding and refundable credits for the year, the IRS says you must pay estimated taxes. Note that special rules apply for farmers and fishermen.
The IRS offers safe harbor guidelines to help you avoid underpayment penalties. For example, you’re in the clear if you pay 90 percent of the tax bill you’ll owe for 2020. But if you have no idea how much you’ll earn this year, you can pay 100 percent of your 2019 tax bill to protect yourself from owing penalties and interest.
“The safe harbor provisions are useful, but if the coronavirus shut down your business and you expect to owe less tax in 2020 than you owed in 2019, then you should do an income tax projection for 2020 to figure out what your quarterly estimates should be,” says O’Connor, who added that some of her clients are “having a really tough time with the business shutdown (mandate in Florida) and making employee payroll.”
“It’s a very dynamic situation,” says her partner Steven Rodriguez.
How to determine what taxes you owe
Form 1040-ES helps you work out your estimated taxes and provides vouchers to send along with your estimated tax amounts if you opt to pay by check or money order. Tax preparation software or your tax 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 2020.
Don’t forget to note if you’ve applied your previous year’s tax refund to this year’s taxes.
High earners, defined as those making $150,000 or more if single or married filing jointly ($75,000 if married filing separately), should pay 110 percent of last year’s tax liability to meet safe harbor rules.
Example: If your tax bill last year was $30,000, this year you would pay $33,000 (10 percent more) in estimated and withholding taxes to avoid paying any underpayment penalties.
But a lot of Americans face uncertainty with respect to their income in 2020. If it’s any comfort, says O’Connor, “The IRS has indicated that it will be very considerate of reasonable cause to abate penalties that might otherwise be incurred.”
How to pay estimated tax
Ideally, the IRS would like to get your estimated taxes in four equal payments over the course of the year, but some businesses are seasonal. For example, a landscaping business makes most of its money during the warmer months of the year. It’s wise to pay the tax as you get income. In this event, you’d follow the annualized income installment method that enables you to pay when you’re flush with cash. Instructions can be found in IRS Publication 505, Tax Withholding and Estimated Tax and Form 2210.
Once you determine the amount to pay, the IRS will accept your money in any number of ways. Instructions for payment options can be found at IRS.gov/payments – and these include direct pay from your checking or savings account, the IRS2Go mobile app, payment with debit or credit card, use of the Electronic Federal Tax Payment System, same-day wire through your bank and even cash at a participating retail establishment.
If you pay online, which you can do any time of the year, be sure to select the tax year and tax type or form associated with your payment. If you pay by check or money order, send the payment along with a Form 1040-ES voucher to the address specified for your state or territory on that form. Make the check out to the United States Treasury, and in the notes section in the lower left corner, specify the tax year and “estimated taxes.”