The IRS reminded taxpayers required to make estimated tax payments for the fourth quarter of 2021 by January 18, 2022, to avoid owing at tax time and possible penalty.
Generally, taxpayers that do not have federal income withheld from paychecks, pension payments, and government payments like Social Security benefits or unemployment compensation, are required to make quarterly estimated payments.
This includes sole proprietors, partners, and S corporation shareholders that expect to owe tax of $1,000 or more, and corporations that expect to owe $500 or more, upon filing their tax returns. Form 1040-ES, Estimated Tax for Individuals, and Form 1120-W, Estimated Tax for Corporations, both contain worksheets for determining who must pay estimated tax.
Estimated payments are typically due on the 15th day of the month following a three-month period. For example, the first quarterly payment is due April 15 for the period January 1 to March 31.
The amount paid must be the lower of 90% of the tax shown on the current year’s return or 100% of the tax from the previous year’s return.
Code Sec. 6654 and Code Sec. 6655 impose penalties for failures by individuals and corporations to pay estimated income tax, respectively. The penalty amount is the underpayment rate pursuant to Code Sec. 6621 and is applied to the amount of the underpayment for the relevant period.
The IRS has noted that, over time, more taxpayers have been subject to estimated tax penalties. The number of taxpayers who paid such a penalty increased from 7.2 million in 2010 to 10 million in 2015.
Individuals who owed last year and did not increase their withholding in 2021 are likely to owe again this tax season.
Recipients of advance child tax credit payments in 2021 that do not expect to qualify for the credit when filing their 2021 income tax return may also need to make estimated payments. Additionally, the IRS reminded taxpayers that unemployment compensation is “fully taxable in 2021,” and that the exclusion of up to $10,200 in unemployment compensation under the American Rescue Plan Act (PL 117-2) only applied to 2020.
Income from virtual currencies and gig economy work are taxable, which may affect a taxpayer’s bill, as would other non-work-related financial transactions like capital gain distributions, stock dividends, and sales of property.
The IRS has a tax withholding estimator tool, but due to a service outage it is unavailable until “late January.”
To make estimated tax payments, taxpayers can use IRS Direct Pay or their IRS online account to schedule payments electronically.
To continue your research on individual estimated tax responsibilities, see FTC/2d FIN ¶S-5200.
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