Estimated Tax Payments question

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johnpau
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Joined: Sat Dec 30, 2017 4:24 pm

Estimated Tax Payments question

Post by johnpau »

Hi

Started to do some side hustle job last year and got some 1099-K from paypal.

Sole-proprietorship ( doing business as -DBA ). 1-man show.

No legal entity registered.

Filed 2020 taxes in 04/2021,owed federal taxes money(16k) and made a full payment at the same time. Always was getting refund, with this new side hustle job first time had to owe fed taxes.

Now for this year planning to make some estimated payment quarterly, so I don't have to owe money during next tax season 04/2022.

Last week I logged into irs website and created an account and made an estimated tax payment this year for 4K (2nd quarter). I see there quarterly deadlines to make payments .

04/15/2021

06/15/2021

09/15/2021

01/15/2022



Questions:

When we make estimated tax payments on irs website, does the payments fall under a generic

pool for the entire year (or) will it be specific to a quarter ?

2) Can we make any number of estimated tax payments in a year (or) should it only be 4 payments (for 4 quarters) ?

Example:- Lets say same as last year, if I'm expected to owe 16K for federal. Can I make estimated tax payments with below options ?



Option 1: 4K each quarter ( total 16K)

Option 2: 16K one lumpsum payment in 2nd quarter 06/2021

Option 3: 16K one lumpsum payment in 1st quarter 04/2021

Option 4: $1333 every month ( $1333 x 12 = 16K total)

Option 5: $6K second quarter (06/2021) $10K third quarter ( 09/2021)



Let me know if all of the above options are allowed, or which one are not allowed.



Thanks for your time.
Last edited by johnpau on Wed Jun 23, 2021 12:40 pm, edited 1 time in total.
FactualFran
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Re: Estimated Tax Payments question

Post by FactualFran »

The date of an estimated payment determine what quarter is was for. Payments made during a year by the deadline for the first quarterly payment are treated as being for the first quarter. Payments made after the deadline for the first quarter and by the deadline for the second quarter are treated as being for the second quarter.

I don't know how many payment can be made for a quarter. I have made at most one per quarter.

With Option 2 in the opening post, if one lumpsum payment for a year is made in the 2nd quarter, then it is possible that there will be an underpayment penalty for the 1st quarter (for which no payment was made).

With Option 5 in the opening post, it is possible hat there will be an underpayment penalty for the 1st quarter (for which no payment was made) and the 2nd quarter (for which $8k was due by its payment deadline, while only $6k was paid).
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Eagle33
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Re: Estimated Tax Payments question

Post by Eagle33 »

Or you could adjust your W2 job withholding. IRS considers withholding as timely tax payments whenever they are made during the year.
water2357
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Re: Estimated Tax Payments question

Post by water2357 »

Read IRS publication 505 on estimated taxes

https://www.irs.gov/publications/p505

https://www.irs.gov/businesses/small-bu ... ated-taxes

If you don't make timely quarterly payments, you could end up owing a penalty. See IRS form 2210 for information on the penalty.

https://www.irs.gov/forms-pubs/about-form-2210

Also, see if you can qualify for a safe harbor exemption from any penalty. One safe harbor applies if you pay at least the same amount in tax for 2021 through withholding and timely estimated payments as you owed for tax year 2020. If your 2021 income is actually higher than your 2020 tax but you made all your estimated payments on time, there is no penalty. There are some other applicable safe harbors, some dependent on income, so check which applies to you.

The key with estimated tax is to pay whatever is owed by each due date (which you listed). The easiest way to do that is to estimate your income for 2021 (if you want the one safe harbor use at least as much as your 2020 total tax), subtract your estimated withholding, and divide the remainder by 4 and pay these 4 amounts by each of the 4 due dates. If your income will be earned unevenly throughout the year, then you can use an alternate method that will allow you to pay tax on the additional income as you earn it. However, that method is much more complicated. In any case, if you don't pay a required payment by its due date, you most likely will be charged a penalty by the IRS, even if you paid more than you owe in tax for 2021.
dbr
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Re: Estimated Tax Payments question

Post by dbr »

In any case you can make as many payments as you want whenever you want. You can pay early and it is also possible to be late if you don't cover the tax associated with each quarter by the due date for that quarter or earlier.

Note payments made by withholding can come in at any time. Retirees taking an RMD can cover the tax bill for the whole year by taking withholding from the RMD in December even with pensions, dividends, Social Security or other income during the year. Wage earners without a large lump sum income like that which is withholdable have to be more careful.
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Lee_WSP
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Re: Estimated Tax Payments question

Post by Lee_WSP »

Options 2 and five will result in underpayment for quarter 1. The payments must be divisible across all four quarters equally. You can front load, but not back load.
gtg970g
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Re: Estimated Tax Payments question

Post by gtg970g »

Related question. If a taxpayer decides in July they want to do a large Roth conversion will there be an underpayment penalty if they split the tax cost between 3rd and 4th quarters?
water2357
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Joined: Sat Sep 12, 2020 9:24 am

Re: Estimated Tax Payments question

Post by water2357 »

If your income increases in July due to a Roth conversion, i.e. the conversion is done in July triggering the need for additional income tax payments, you can begin to pay the required extra tax for the 9/15/21 and 1/15/22 payment deadlines. The Rules for how to change your estimated tax payments are in the 2021 estimated tax instructions on the IRS website form 1040ES.

To actually demonstrate to the IRS that you do not owe a penalty because you changed your estimated tax payments you will need to review the penalty form 2210. You will now be using the alternate method of having acquired income unevenly throughout the year. The time periods of income are not quarters, they are various sets of months. You should really look at both IRS pub 505 and form 2210 before doing anything.

And remember that since the IRS does not know how much income you acquired each month, it is up to you to file form 2210 with your 2021 taxes to demonstrate to them that you used the alternate method properly and you don't owe a penalty.
Sahara
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Re: Estimated Tax Payments question

Post by Sahara »

The overall concept is that withholding from W2 pay, retirement distributions, or pensions is considered to have happened throughout the year. If you don't have any of these it's important that the payments correspond with the income (for example, the income from your 1099 side hustle.) Some people will adjust pension or W2 withholding to cover 1099 income as well.

It sounds like you'll be able to avoid a large tax bill for 2021.

Some might not worry about the larger tax bill if it doesn't incur penalties and interest. In order to determine whether you would face a penalty for underpayment, you'll want to explore the "safe harbor."
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