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Confused about your estimated payment deadline? You’re not alone. The series of events leading up to the extension for estimated payments (not once, but twice) has left many taxpayers bewildered. Here’s what you need to know.
In response to COVID-19, the Internal Revenue Service (IRS) announced in March that the tax filing season had been pushed to July 15, 2020. It wasn’t until April, however, that the IRS made clear that the relief applied to estimated tax payments due June 15, 2020. Previously, the relief only applied to the April 15, 2020, estimated payments – which had the absurd result of having second quarterlies (due June 15, 2020) due before first quarterlies (moved to July 15, 2020).
As a result, some taxpayers remain confused. Here are some additional details to help you sort it all out:
When are estimated payments due for the first quarter of the 2020 tax year (those originally due April 15, 2020)? July 15, 2020
When are estimated payments due for the second quarter of the 2020 tax year (those originally due June 15, 2020)? July 15, 2020
Ok, if estimated payments for the first and second quarters are due on the same day, can I write one check? Yes. The IRS says you can make a single payment to cover your first and second quarter estimated tax payments.
Can I combine my estimated tax payment with my tax payment for 2019 (also due July 15, 2020)? No. If you owe a 2019 income tax liability, as well as estimated tax for 2020, you must make two separate payments (one for the 2019 income tax liability and one for the 2020 estimated tax payments).
How do I let the IRS know that I’m making both estimated payments at the same time? If you’re making estimated tax payments for 2020 – and you’re paying by check, money order or cashier’s check – be sure to fill out a Form 1040-ES payment voucher. Indicate on your check memo line that this is a 2020 estimated tax payment. It’s not clear that you have to include vouchers for both years (and the vouchers have not been revised to account for the extension), but I’m hearing that many advisors are suggesting that you send both even if you’re only sending one check. This is my preferred approach, too.
What about if I’m paying electronically? That’s a bit different since you don’t use vouchers for electronic payments. With Direct Pay, so long as you make estimated tax payments in advance of the timely filing of your return, you don’t have to indicate the quarter associated with the payment.
How do I pay electronically? Individual taxpayers can sign up to use Direct Pay to pay online directly from a checking or savings account for free, and to schedule payments in advance.
How much can I pay electronically? You can pay up to $9,999,999.99 through Direct Pay. If you need to pay more, you’ll have to choose EFTPS or same-day wire (also, you may need better tax planning).
Is there a limit on checks, too? Yes. The IRS hasn’t accepted checks for $100 million or more since 2016. I have a feeling that most taxpayers aren’t too worried about this one either.
What about other payment options? For more options, you can check out this article.
I don’t know if estimated tax payments apply to me. How do I know? In most cases, you pay estimated tax for 2020 if you expect to owe at least $1,000 in tax for 2020 AND you expect your withholding and refundable credits to be less than the smaller of 90% of the tax to be shown on your 2020 tax return or 100% of the tax shown on your 2019 tax return.
I don’t normally owe tax but someone told me that I should make estimated tax payments since I’ve been receiving unemployment. Is that true? Yes. For federal income tax purposes, unemployment compensation is taxable: this includes your state benefits and the $600 payment from the feds. To help manage the tax due, you can choose to have federal income tax withholding on your benefits or consider making estimated payments during the year.
If I think I owe estimated tax payments, how do I figure out what to pay every quarter? Most tax professionals can calculate this number for you (ditto for software programs) but if you’re looking for an easy formula, take the amount of tax you expect to owe in 2020 and divide it by four: that’s your quarterly payment. So, for example, if you expect to owe $5,000 in 2020, you’ll pay $1,250 each quarter ($5,000/4).
What happens if I miss a payment? Missed payments can be subject to penalty and interest. That’s why you want to make both payments for 2020 by July 15, 2020.