The tax payment deadline of April 15 had been postponed to July 15, 2020, by the federal and state governments owing to the coronavirus pandemic. A taxpayer can request an extension to file until October 15, 2020, but all estimated tax payments are due by July 15.
Estimated payments are due in case of an individual with business types of either sole proprietorship, partnership or S Corporation and expected to owe a tax of $1,000 or more when filing the return. Corporations have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. This is the total tax owed after subtracting withholdings and credits.
There are a host of other tax deadlines linked to July 15. You may need to make a payment if one of the following situations applies to you:
- Paychecks are under ‘withheld’ status – this may be applicable when a portion of the individual’s paychecks are withheld for income tax purposes and a payment submitted by the employer to the IRS on his / her behalf. If the withheld amount is not sufficient, a request can be made to the employer to increase it to avoid making estimated tax payments in the future.
- Unemployment compensation paychecks are under ‘withheld’ status – unemployment compensation is subject to federal income tax and subject to income taxes in several states. While some unemployment benefit checks withhold a percentage of the payment for income tax purposes, more taxes than those being withheld may need to be paid.
- Self-employed workers – Self-employed workers are required to make 4 estimated tax payments over a year. They include gig economy workers, freelancers, S corporation shareholders, and partners in a partnership.
- Retirees – they may owe tax on Social Security benefits, income from investments distributed, or other unearned income. A portion of pension plan distributions may be withheld, but many times the amount withheld does not cover the entire tax liability, resulting in an underpayment.
- Sale of a major asset – tax may be owed tax on selling an asset such as a house, or securities, resulting in a large capital gain.
- Alimony – if alimony is being paid under a divorce decree entered into before 2019, the payments constitute taxable income. Alimony from post-2018 agreements, however, are not taxable.
How to make estimated tax payments
Estimate the total income for 2020, then compute the 2020 tax bill and halve it. This amount may be compared with the amount withheld from paychecks and unemployment benefits, and any other payments made to the IRS. If the withholding is less than the amount calculated, consider making an estimated payment by July 15 to make up the difference. This payment is made with Form 1040-ES.
If payments are not made, and more than $1000 as taxes are owed, a penalty may be applicable. This may be avoided if at least 90% of the total tax for 2020 or 100% of the tax shown on the return for 2019 is paid, whichever is smaller. If the 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.
If you do end up owing a penalty, you can request a waiver based on the clause “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.”
Please keep in mind that the IRS has stated that though the penalties through July 15 would be waived due to Covid-19, interest, penalties, and additions to tax with respect to such postponed Federal income tax payments will begin to accrue from July 16, 2020.