Oops, I Missed my Estimated Tax Payment!
The IRS extended the filing deadline to May 17, 2021, but did not extend the April 15 deadline for 2021 first quarter estimated tax payments, which has caused some confusion.
Your accountant told you to make an estimated tax payment toward this year’s taxes, but you missed making the payment on April 15th. Oh no, the taxman is coming for you! What do you do? Fortunately, the IRS is not going to seize all your property and hall you off to jail just yet. In fact, the IRS does not even know if you owe an estimated tax payment or not, and they will not act or send notices until your tax return and full payment is due next April. If you file and full-pay on time but failed to make a required estimated tax payment on time, a relatively small penalty will get added to your total annual tax.
Currently, the penalty is equivalent to a three percent annual interest rate. In some cases, you may actually be better off paying the penalty and keeping your money longer. If you fail to file and/or fully pay your taxes by the extended May 17th deadline (Or July or May, or whenever the powers that be decide to change the deadline too), penalties are much more severe, and the IRS will start taking action relatively promptly.
If you want to avoid the penalty for underpayment of estimated tax (The “prepayment penalty”), there are some options available.
- The first thing to consider adjusting is your federal tax withholding. It is easy to withhold too little without meaning too. In recent years tables of what you should withhold are available such as in the 15-T IRS document, and if necessary, you can withhold extra funds.
- Secondly, make the estimated tax payment as soon as possible. The penalty is calculated based on how late the payment is submitted. If you are a week or two late, the penalty is likely a low percentage. The moment you realize you missed the date gets it paid. You can send a check but, it is faster to pay through the IRS’s secure portal HERE.
- If you receive a large portion of your income later in the year, there is an optional annualized income installment method to calculate your required estimated tax payments and penalties. There are a lot of pieces to consider. Perhaps we’ll write an article specifically on this in the future but, you can learn more about it HERE.
- Lastly, if all else fails and you have not filed yet, you can file an extension for 2020. Overpay enough to cover the first quarter estimated tax payment and avoid the penalty.
In summary, if you missed an estimated tax payment, breathe. There are options to help you overcome the obstacle and get back on track with your taxes. One of the most valuable and underutilized benefits to hiring a skilled accountant is situations just like this one. Your consultant can help you choose the option best for you.
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