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Small business owners and side gig hustlers face a big tax deadline.
Filers who pay estimated taxes each quarter, including independent contractors and partners in corporate entities, are due their final 2020 payment on January 15.
In general, the other deadlines for quarterly taxpayers are April 15, June 15, and September 15.
Last year was an extraordinary year from a tax planning standpoint, as the Treasury Department and the IRS pushed back due dates for the first and second quarter estimated payments to July 15.
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Normally, employees don’t have to worry about quarterly payments. That’s because their employers typically withhold income taxes from their pay during the year.
Meanwhile, sole proprietorships and other small businesses are responsible for paying their estimated self-employment and income tax four times a year.
“If you were getting income all year, the IRS will calculate what tax you should have paid quarter for quarter,” said Dina Pyron, global TaxChat leader at Ernst & Young.
Failure to make payments by the deadline will result in underpayment penalties.
Make accurate payments, avoid fines
In general, to avoid an underpayment penalty, you must pay at least 90% of the tax for the current year or 100% of the tax on your return for the previous year.
If your adjusted gross income on the prior year’s return was greater than $ 150,000, then you must pay 110% of the tax liability.
Those estimates can be thrown away by year-end surprises, including commissions and bonuses, that can push up your income.
Small business owners and many other quarterly taxpayers faced an uphill battle in 2020 as they not only struggled with declining incomes but were still on the hook for those quarterly payments.
Some entrepreneurs had to make difficult choices until 2020 to make ends meet.
“If you have a business that is drastically affected by Covid-19, and you are a sole proprietor and you owe quarterly estimates, you may have to choose between paying the estimate or keeping the money in the business,” said Dan Herron, CPA and Director of Elemental Wealth Advisors in San Luis Obispo, California.
“You’re on the hook for those quarterly payments, but suppose your payment is $ 4,000,” he said. What is the opportunity cost of the $ 4000, does it mean you will be in business for another month? That is the choice. ‘