Despite the individual tax filing due date being delayed until May 17, 2021, there is no delay in paying first quarter estimated tax payments for the 2021 tax year. So it is time to review your tax situation for the 2021 tax year and make an estimated quarterly tax payment using Form 1040-ES.
First quarter due date: Thursday, April 15, 2021
You are required to withhold or prepay throughout the 2021 tax year at least 90 percent of your 2021 total tax bill, or 100 percent of your 2020 federal tax bill.* A quick look at your 2020 tax return and a projection of your 2021 tax obligation can help determine if a quarterly payment might be necessary in addition to what is being withheld from any paychecks.
Here are some things to consider:
Underpayment penalty. If you do not have proper tax withholdings throughout the year, you could be subject to an underpayment penalty. A quick payment at the end of the year may not be enough to avoid the underpayment penalty.
W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may be able to adjust your W-2 wage withholdings to make up the difference.
Self-employed. In addition to paying income taxes, self-employed workers must also account for paying Social Security and Medicare taxes. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.
Use your refund? An alternative option to pay your 2021 first quarter estimated tax is to apply some or all of your 2020 tax refund.
ALERT! The tricky part of this approach in 2021 is with the individual tax filing due date being delayed until May 17, 2021, the IRS hasn’t announced whether it will apply a penalty to 2020 refunds applied to 2021’s tax obligation as a first quarter payment if made after April 15.
Pay more in the first quarter. By paying a little more than necessary in the first quarter, you can be in a position to adjust future estimated tax payments downward later in the year if your 2021 tax obligation appears like it will be lower than you originally thought.
Not sure if you need to make a quarterly payment? Take a quick look at your 2020 tax return to see the amount of tax you paid. Divide the tax by the number of paychecks for the year. Is enough being withheld from your paycheck? Consider adjusting your withholdings with your employer if you think it is necessary to cover your 2021 tax bill.
*If your income is more than $150,000 ($75,000 if married filing separate), you must pay 110 percent of your 2020 tax obligation to be safe from an underpayment penalty on your 2021 tax return.
If you have any questions about your estimated tax payment, please contact any member of the Baker Holtz staff at (616)458-1835