While individuals who work for companies traditionally have taxes withheld from their paychecks, independent contractors and those who subsist on investment income should proactively pay estimated taxes. Payments are typically made incrementally, on the following quarterly deadlines:
- April 15
- June 15
- Sept. 15
- Jan. 15 of the following year
The tax filing and payment extension due to the coronavirus outbreak changed these deadlines in 2020. Estimated tax payment 1, usually due on April 15, became due on July 15. Estimated tax payment 2 also moved to that date.
- While individuals who work for companies traditionally have taxes withheld from their paychecks, independent contractors and those who subsist on investment income should proactively pay estimated taxes.
- The coronavirus outbreak changed the deadlines for estimated tax payments for 2020. They are: Wed., July 15 (payments 1 and 2); Tue., Sept. 15 (payment 3); and Fri., Jan. 15, 2021 (payment 4).
If a due date falls on a weekend or legal holiday, payments must be issued on the next business day. This caused some 2019 dates to fall a bit later than the 15th of the month, but that is not the case for 2020.
Bear in mind that those who file for personal income tax extensions must still adhere to the quarterly payment deadlines. Furthermore, even though you may have paid the first installment of estimated taxes for 2020 on the same day that you filed your 2019 tax return (and your first 2021 installment on the day you file your 2020 taxes, April 15, 2021), these are entirely separate actions.
Calculating Payments: The $1,000 Rule
Those who project their 2020 tax bill to be under $1,000, after taking into account any withholding and refundable tax credits such as earned income credits and premium tax credits, do not need to bother with estimated taxes. All others should employ one of the following two approaches.
- Pay estimated taxes to avoid or minimize penalties
- Increase withholding to cover projected taxes
Employed individuals should increase withholding by filing a new Form W-4 with their employers. Those receiving pension or annuity income should file Form W-4P with the plan administrators or other parties who pay out the benefits. Individuals may opt for voluntary withholding on such payments as Social Security benefits and unemployment benefits by filing Form W-4V.
It can be difficult to project total taxes at the start of the year. Fortunately, the following safe harbor provisions can help individuals avoid penalties for inaccuracy:
- Current year safe harbor: If the estimated taxes you pay turn out to be at least 90% of your final bill for 2020 and you made payments on time, no penalties will apply.
- Prior year safe harbor: If you use your 2019 tax bill as a barometer for your 2020 liability, you are likewise sure to be penalty-free as long as the taxes you pay are at least 100% of your 2019 bill. However, if your adjusted gross income for 2019 was more than $150,000 ($75,000 for those who are married filing separately), the 2020 payments must be at least 110% of the 2019 bill. It should be noted that different rules apply to farmers and fishermen.
If your income changes dramatically during the year, you can adjust the remaining estimated tax payments accordingly. For example, if you lose your job mid-year you may reduce the rest of your estimated tax payments for 2020 to avoid or minimize overpayment.
What's New for 2020 Taxes
When using 2019's tax bill to project 2020's liability, take the following adjustments into account:
- Changes in circumstances for this year: Will a marriage or divorce cause changes to your filing status and the associated tax rates? Are you expecting a child who will result in a child tax credit? Will a new home purchase entitle you to added deductions for mortgage interest and real estate taxes?
- Inflation adjustments: Dozens of tax breaks are adjusted annually for inflation, such as the IRS standard mileage rates. These may result in less tax liability, even if income remained consistent from 2019 to 2020.
- New tax rules: The 2017 Tax Cuts and Jobs Act significantly altered the tax rules and will have the following continued effects through 2025:
- The standard deduction has essentially been doubled.
- The personal exemption is no more.
- Significant personal income tax bracket changes give taxpayers at both ends of the spectrum a significant tax cut while raising taxes for upper-middle/lower upper-income level taxpayers.
- A slew of miscellaneous deductions were jettisoned, including job relocation–related expenses (except for active duty military).
The Bottom Line
While estimating taxes isn't an exact science, coming close to the correct amount will help individuals avoid penalties if they're mindful of the quarterly deadlines. Finally, it's important to consult tax professionals when questions about difficult issues arise.