I have very uneven income as self employed consultant. There was no income for first half of year, but now I have several invoices paid and so will owe tax at the end of year. I missed my estimated payments, so what is the best approach? Should I just pay IRS all due, e.g. calculate new estimate and pay combined for 1-3 quarter of 2021?
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Hi VladyP,
The general rule is that you must pay as you go. Meaning that when you file your tax return, if you haven't paid enough taxes through withholdings or estimated tax payments then you might owe an underpayment penalty.
To determine whether you need to make quarterly estimates, answer these questions:
If you answered "no" to all of these questions, you must make estimated tax payments using Form 1040-ES. To avoid a penalty, your total tax payments (estimated taxes plus withholding) during the year must satisfy one of the requirements above.
Please remember that when you are preparing your 2021 tax return, should the software calculate an underpayment penalty, follow the prompts and complete the underpayment penalty section. You will have an option to choose the annualized income method. By using this method, you will report uneven income earned during the year and potentially reduce or eliminate your underpayment penalty, accommodating the missed estimated payments earlier in the year.
Yes, pay any estimated payments for income earned from January-August (which would have been due September 15) as soon as you can. Any penalties and interest will be calculated from the date owed to the date paid, so paying now, rather than in January, will reduce any interest you might owe. Taxes on income earned between Sept 1 and Dec 31 would be due January 15, 2022.
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