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Small business owners and bumblebees from a side series have a big tax deadline.
Filers who pay estimated taxes each quarter, including independent contractors and partners in business entities, owe their final payment of 2020 on January 15th.
Generally, the other deadlines for quarterly taxpayers are April 15, June 15, and September 15.
Last year was an extraordinary one from a tax planning perspective, as the Treasury Department and IRS delayed the estimates for the estimated payments in the first and second quarters to July 15th.
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Normally, employees do not have to worry about quarterly payments. This is because their employers usually withhold income tax from their payment during the year.
Meanwhile, sole proprietorships and other small businesses are responsible for paying their estimated taxes on self-employment and income tax four times a year.
“If you were to receive income all year long, the IRS would calculate what tax you had to pay quarter by quarter,” said Dina Pyron, global TaxChat leader at Ernst & Young.
If your payments fall short by the due date, the penalty for underpayment will start to accrue.
Make accurate payments, avoid fines
To avoid an underpayment penalty, you should generally pay at least 90% of the tax for the current year or 100% of the tax for your return for the previous year.
If your adjusted gross income on the previous year’s return exceeds $ 150,000, you will have to pay 110% of the tax liability.
These estimates can be surprised by surprises at the end of the year, including commissions and bonuses, which can increase your income.
Small business owners and many other quarterly taxpayers experienced an uphill battle in 2020 because they not only struggled with dwindling incomes but also still hooked up for quarterly payments.
Some entrepreneurs had to make difficult choices by 2020 to get by.
“If you have a business that is drastically affected by Covid-19, and you are a sole proprietorship and owe your quarterly estimates, you may have to choose between paying the estimate or keeping the cash in the business,” said Dan Herron, CPA. . and principal of Elemental Wealth Advisors in San Luis Obispo, California.
“You like the quarterly payments, but say you pay $ 4,000,” he said. “What does the $ 4,000 cost price mean you stay in business for another month? That’s the choice.”