Tomorrow could possibly be final probability for some individuals to keep away from large tax penalty
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Small business owners and side gig hustlers face a big tax deadline.
Applicants paying quarterly estimated taxes, including independent contractors and corporate partners, owe their final 2020 payment on January 15th.
Generally, the other deadlines for quarterly taxpayers are April 15th, June 15th, and September 15th.
Last year was exceptional from a tax perspective as the Treasury and IRS moved the due dates for the estimated payments in the first and second quarters to July 15.
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Usually, employees don’t have to worry about quarterly payments. This is because their employers usually withhold income tax from their salary during the year.
Meanwhile, sole proprietorships and other small businesses are responsible for paying their estimated self-employment and income taxes four times a year.
“If you have year-round income, the IRS calculates quarterly what taxes you should have owed,” said Dina Pyron, global tax chat leader at Ernst & Young.
If you miss your payments on time, you will incur underpayment penalties.
Make accurate payments, avoid penalties
Generally, to avoid an underpayment penalty, you must pay at least 90% of tax for the current year or 100% of tax on your tax return for the previous year.
If your adjusted gross income from last year’s return exceeded $ 150,000, you must pay 110% of the tax liability.
Year-end surprises, including commissions and bonuses that can add to your income, can negate these estimates.
Small business owners and many other quarterly taxpayers faced an uphill battle in 2020 as not only did they struggle with falling incomes, but they were still hooked for those quarterly payments.
Some entrepreneurs had to make tough decisions by 2020 to get through.
“If you have a company that has been severely affected by Covid-19, are a sole proprietorship and owe quarterly estimates, you may have to choose between paying the estimate or keeping the cash,” said Dan Herron, CPA and director of Elemental Wealth Advisors in San Luis Obispo, California.
“They are hooked for these quarterly payments but say your payment is $ 4,000,” he said. “What is the opportunity cost for the $ 4,000? Does that mean you’ll stay in business for another month? That’s the choice.”