People who are staring at a federal income tax bill are getting a bit of a breather, now that the Internal Revenue Service has set May 17 as the new deadline to pay 2020 taxes and file a return during this tumultuous tax season.
But gig workers, freelancers and self-employed small business owners can’t relax completely.
April 15 is still the deadline to send in estimated tax payments, the IRS confirmed Wednesday. That means these folks have a May 17 deadline to settle up their 2020 federal taxes, but they also have an April 15 deadline to pay one-fourth of their projected 2021 federal tax bill.
“Talk about confusing, for not only the tax professional community, but also for individual taxpayers,” Barbara Weltman, founder of Big Ideas for Small Business and the author of “J.K. Lasser’s Guide to Self-Employment.”
9.5 million estimated payments in 2018
The decision keeping the current estimated payment intact could affect millions of people, according to one estimate. More than 9.5 million individual returns in the 2018 tax year included estimated tax payments, according to the American Institute of Certified Public Accountants.
Last year, the IRS pushed the income tax filing deadline to July 15 due to the pandemic’s havoc. At the time, the agency also said the estimated payments due in April and June of that year were pushed to July 15, 2020.
That’s not happening this year and Barry Melancon, AICPA’s CEO, said, “this selective decision by the IRS unfortunately creates more bureaucracy and confusion and is out of sync with real world stresses that taxpayers, tax practitioners and small businesses are dealing with.”
The organization credited the IRS for the filing extension, but it was hoping for a June 15 deadline instead.
On Thursday, IRS Commissioner Charles Rettig told lawmakers there was a reason why the estimated payment date did not budge.
“There’s a large contingent of wealthy individuals in this country who do not make their estimated payments,” Rettig told members of the House of Representatives’ Oversight Subcommittee within the Ways and Means Committee. Instead, they calculate the potential interest rates they’d face in penalties versus the potential returns from investing the money. “And we’re not going to give them a break of interest and penalties to do so.”
The IRS said most people automatically have their taxes withheld by their employer, who then sends it along to the tax collection agency.
“The issue is where do we draw the line,” Rettig said at another point in the hearing, defending the still-intact April 15 deadline for estimated payments. “And that line will quickly extend to wealthy individuals who will game the system. Every time we open a door, they come in with all their advisors and everything else.”
The line, Rettig explained, ended at more relief for income tax filers which included “the most vulnerable individuals.”
Let’s break down what’s self-employed taxpayers still need to plan for.
A paycheck from an employer already has money taken out for income taxes, Social Security and Medicare. The IRS noted Wednesday most people automatically have their taxes withheld by their employer, who then sends it along to the tax collection agency.
But if a person is making their living as a gig worker, a freelancer, a sole proprietor, a partner in a partnership or a member in a limited liability company, they do not have an employer cutting them a paycheck.
That’s where the estimated taxes come in. America has a “pay-as-you-go” tax system, Weltman explained. “You can’t just wait and pay at the end.”
In addition to April 15, estimated payments for this tax year are also due on June 15, Sept. 15 and Jan. 18, 2022.
A person who pays too little along the way can face penalties, Weltman said. But there are ways to avoid this.
The IRS says most people paying estimated taxes will avoid the money penalty’s ding if they owe less than $1,000 after accounting for their withholdings and credits. Another way is if they paid at least 90% of their upcoming tax bill.
There’s also a safeguard against penalties for people who have earned less than $150,000 the year before, Weltman said. They’ll avoid penalties when paying one-fourth of last year’s total tax bill with every installment.
Putting payment deadlines aside, it’s still not easy for people paying estimated taxes because they need to plan for four bills along the way. “One of the biggest challenges for people making estimated payments is having the cash to do it,” Weltman said.