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Some taxpayers still need to send money to Uncle Sam this April, even though the IRS extended the tax-filing season to May 17.
Those who make estimated tax payments are still on the hook for their first quarterly levy, which is due on the original tax filing deadline of April 15.
That includes people who have income that is not subject to withholding, such as earnings from self-employment, interest, dividends, rent and alimony, according to the IRS.
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This mostly affects freelance and gig workers, as well as those with small businesses such as sole proprietors, partners and S-corporation shareholders — generally, anyone who doesn’t work for an employer that withholds taxes from their paycheck.
The due date marks a change from 2020, when the IRS did push back the deadline for the first of four estimated tax payments to July 15 due to the coronavirus pandemic. However, the agency didn’t push back the three remaining payments — the second quarterly payment was also due on July 15, 2020.
What you need to do
To avoid penalties for underpaying estimated taxes, people who owe more than $1,000 in tax after subtracting withholding and credits must pay the IRS at least 90% of the tax for the current year or 100% of the tax for the prior year, whichever is smaller.
This tax is paid in four quarterly installments and can be sent to the IRS either online or with a check. For those who have consistent income throughout the year, these payments are generally equal but can be varied for those with uneven earnings.
Because making estimated payments means taxpayers need to know their income from the last year, this group likely won’t be able to take advantage of the extended filing season.
To calculate a quarterly estimated payment, taxpayers need to either project their income for the year or have their previous year’s income handy, as they’d have it for their tax return.
“You still have to complete the 2020 return to get a bottom-line number to pretty much do an estimate,” said Rhonda Collins, director of tax content and government relations at the National Association of Tax Professionals. “So it’s still going to create a little bit of work for the taxpayer.”
On top of that, small businesses and self-employed individuals paying estimated taxes have been hit particularly hard by the Covid pandemic and may be dealing with multiple issues that would complicate tax filing. Some may have loans through the Paycheck Protection Program, an Economic Injury Disaster Loan or a grant.
“Conflating all of those things on top of each other, there is really no relief for those individuals,” said Barry Melancon, a certified public accountant, chartered global management accountant, and president and CEO of the American Institute of CPAs.
There are penalties if you miss a payment
To be sure, keeping the April 15 estimated tax deadline can help those who need to make the quarterly payments manage their cash flow throughout the year, said Sheneya Wilson, CPA and founder of Fola Financial in New York.
Even if you do make estimated payments, you can calculate what you owe for April 15 and take advantage of the extension to file your tax return later, said Wilson.
In addition, if you miss the first payment or underpay, the penalties are generally small amounts, according to Adam Markowitz, an enrolled agent with Howard L Markowitz PA CPA in Leesburg, Florida.
If it doesn’t get done, it’s not the end of the world.
enrolled agent, Howard L Markowitz PA CPA