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suburbanguk
Level 1

Is my 2021 Estimated Tax too low? Is Turbotax incorrectly applying the Max Self-Employment Tax deferral?

Part 3 of Schedule SE calculates my max deferral of self-employment taxes as $5,130 (line 26).

 

However, I paid most of this already through 2020 Estimated Payments and only qualify to defer about $800 (not sure if I will or not).

 

Regardless of whether I take the deferral or not, TurboTax is giving me some pretty low 1040 ES vouchers.  Following the data sources, it looks like the Estimated Tax Payment Options Form is ultimately referencing Line 2 on Form 2210.  That line is calculated as my Self-Employment tax MINUS my maximum Self-Employment Tax Deferral ($5,130).

 

Assuming my income is steady next year, wouldn't this ultimately have me underpay my 2021 taxes by the $5,130?  

5 Replies
npierson7
Employee Tax Expert

Is my 2021 Estimated Tax too low? Is Turbotax incorrectly applying the Max Self-Employment Tax deferral?

It is obviously am error with your deferral amount. As for the estimate taxes, please keep in mind they are always approximate amounts, your income can increase or decrease in this year, it is hard to predict. You can use the IRS estimate tax calculator here:

 

Estimated Taxes

 

 

suburbanguk
Level 1

Is my 2021 Estimated Tax too low? Is Turbotax incorrectly applying the Max Self-Employment Tax deferral?

Thanks for the quick response! The problem is I can't find an error with my deferral amount.

 

I'm not too concerned with my estimated (understand it is an approximation). But this particular calculation is troublesome in that, if somebody didn't know better, they could be caught off guard with a hefty tax bill come 2021 tax season. 

 

I posted hoping to figure our whether this is: 1)something I am misunderstanding, 2)an error in the software, or 3) just a quirk of the tax guidelines that justifies a significant underpayment of estimated taxes.

DawnC
Employee Tax Expert

Is my 2021 Estimated Tax too low? Is Turbotax incorrectly applying the Max Self-Employment Tax deferral?

Have you already entered the amount of estimated taxes you paid in 2020?    The deferral amount can't (or it shouldn't be) be more than your tax liability.   

 

The deferred deposits of the employer's share of Social Security tax must be deposited by the following dates (referred to as the "applicable dates") to be treated as timely (and avoid a failure to deposit penalty):

  • On December 31, 2021, 50 percent of the eligible deferred amount; and
  • On December 31, 2022, the remaining amount.

 

How does TurboTax calculate my estimated tax payments?    Please see the following Q&A from the IRS......

 

 

Q22.  Is there a penalty for failure to make estimated tax payments for 50 percent of Social Security tax on net earnings from self-employment for the payroll tax deferral period?

A22.  No. For any taxable year that includes any part of the payroll tax deferral period, 50 percent of the Social Security tax imposed on net earnings from self-employment attributable to the payroll tax deferral is not used to calculate the installments of estimated tax due under section 6654 of the Internal Revenue Code. This means that self-employed individuals that defer payment of 50 percent of Social Security tax on their net earnings from self-employment attributable to the period beginning on March 27, 2020, and ending on December 31, 2020, may reduce their estimated tax payments by 50 percent of the Social Security tax due for that period.

 

 

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suburbanguk
Level 1

Is my 2021 Estimated Tax too low? Is Turbotax incorrectly applying the Max Self-Employment Tax deferral?

So this is getting closer to the issue...

Yes I have entered my estimated taxes, and I understand my deferral cannot be more than my tax liability.  

The Q&A from the IRS would have been helpful in deferring my estimated payments in 2020 based on income from March 27 - December 31.  That all makes sense to me.

 

The issue I am having is that TurboTax uses Line 2 of Form 2210 to determine Estimated tax liabilities.  Because that line subtracts out the max deferral, TurboTax is suggesting I pay estimated taxes for 2021 that are based on my total actual liability ($19,394) MINUS 2020s deferrable max ($5,130).  That does not make sense to me.   

It almost seems like it is implicitly assuming we will be able to defer a share 2021 taxes as well, which I don't think is true, and would leave me with a $5,130 shortfall next April.

 

 

DawnC
Employee Tax Expert

Is my 2021 Estimated Tax too low? Is Turbotax incorrectly applying the Max Self-Employment Tax deferral?

Is your max deferral $800 or $5130?   The amount you opt to defer (the amount on Schedule 3, Line 12e) is factored in if using method 2 below, but you can opt to use the higher method (opt 1).   The deferred amount lowers the amount of your 2020 'Other Taxes' amount.  Based on your 2020 tax info, we’ll use the lower of the following IRS-approved methods to calculate your estimated tax payments.   

  • 90% of your estimated 2021 taxes
  • 100% (110%) of your actual 2020 taxes

There are two additional IRS approved methods available:

  • 100% of your estimated 2021 taxes
  • 66 2/3% of your estimated 2021 taxes (farmers and fishermen only)

If you’d like to use one of the additional methods, answer Yes to the question "Do you want to adjust your income or deduction?" on the Review Your Estimates for 2021 screen. Once you review your income and deductions, you’ll have the option to select from any of the four methods.

 

You can choose the higher option and generate the payment vouchers by doing this:

  1. With your tax return open, search for 1040-es (be sure to include the dash) and select the Jump to link.
  2. Answer No to the question Do you want to change your W-4 withholdings for 2021?
  3. Answer the questions about things like your 2021 filing status, income, and deductions.   
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