“Taxes” engraved at IRS headquarters in Washington, D.C.
Andrew Kelly | Reuters
Next week may be the last chance for some filers to avoid a tax penalty and reduce their bill in April.
The deadline for fourth-quarter estimated tax payments is Jan. 18, applying to income from self-employment, small businesses, gig economy work, investments and more.
And if you missed previous quarterly payments for 2021, you can send extra now, which may reduce or eliminate late penalties, rather than waiting until the April filing deadline, according to the IRS.
“Everyone needs to pay taxes,” said certified financial planner Bryan Hasling, partner at Lodestar Private Asset Management in Alamo, California. “And the IRS strongly prefers that you pay them steadily across the year as opposed to waiting until the last minute — which is tax day.”
The late payment penalty is 0.5% of your balance due, for each month after the due date, up to 25%.
You can skip penalties by covering 90% of your 2021 taxes or paying 100% of your 2020 bill if your adjusted gross income is less than $150,000. (You’ll need 110% of your 2020 bill if you earn more than $150,000.)
If you made similar income in 2020 and 2021, you can check your 2020 return for last year’s tax liability and divide that number into four quarterly payments.
However, following these guidelines could still result in a hefty bill for 2021, explained Or Pikary, a CPA and tax advisor at Mazars, a tax advisory firm in Los Angeles.
Independent contractors often get paid at the end of large projects. And those timelines might not line up with quarterly schedules from the IRS.
partner at Lodestar Private Asset Management
“Situations change from year to year,” he said. “2020 could have been a down year and you may not be paying enough.”
Moreover, the advance child tax credit payments used 2019 or 2020 income to determine eligibility, meaning that if your 2021 income doesn’t qualify, you may have to pay some of it back, he said.
Other scenarios that may require estimated tax payments could be selling a property, cashing out investments, including cryptocurrency or taking money from inherited retirement accounts, said Olga Espiritu, a CFP and president of Tree Of Life Wealth Advisory Group in Cooper City, Florida.
“Those are things that people don’t usually deal with every year, and they might come as a surprise,” she said.
However, there may be some scenarios where filers purposely skip estimated payments, despite the late fee, because they don’t have the cash or prefer not to drain their savings, Hasling from Lodestar Private Asset Management said.
“Independent contractors often get paid at the end of large projects,” he said. “And those timelines might not line up with quarterly schedules from the IRS.”
Whether to make estimated tax payments may be less about the penalty and more about their cash flow, Hasling said.