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

[suburbanguk]

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?  

[npierson7]

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]

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]

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.

[suburbanguk]

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]

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.   

[LBrand]

I came here for this exact scenario. I haven't had to pay estimated taxes in the past as this is the first year we've come out owing at tax time. We deferred more than $2000 in self-employment tax leaving us with a tax due of just over $1000. Turbo Tax calculated vouchers for 2021 on the $1000 not the $3000. That is unfortunate and shouldn't be the way it's calculated, though I see how it happened. I paid the $250ish it told me to pay (which puts me after the due date unfortunately since I took advantage of the extension without realizing I was going to have to pay estimated taxes). Now I don't think that amount was nearly enough and I'm not sure how to go about rectifying that and don't want to get hit with penalties as I don't really understand the ropes, never having had to pay estimated taxes. Anyone have any guidance for a newbie to estimated tax payments?

[LBrand]

So when you say: 

• 100% (110%) of your actual 2020 taxes

Does that mean that the penalty threshold only applies to amounts paid at tax time and not including amounts deferred?

So in my case, with payment due at 2020 filing of $1036, I only need to pay that much during 2021 regardless of the amount of my actual tax due at 2021 filing? I may be short and need to have the amount available to pay, but won't be subject to a penalty?

Thanks in advance for your clarification.

[suburbanguk]

So I never really got a great answer for this.  I afraid there is a mistake in TurboTax, but here's how I have decided to handle it: I'm paying what TurboTax tells me to pay each quarter for estimated taxes. Pretty sure I wont get penalized for this, considering it is what TurboTax suggests and matches my tax liability for 2020.  BUT I am setting aside the extra amount that I think I might owe based on a normal tax year, so I am not hit with any surprise shortfall in taxes next year.

[LBrand]

Thanks for the reply, @suburbanguk ! I'm looking for a more clear answer than "pretty sure" as I'd prefer to avoid any unnecessary penalties come tax time. I'll definitely set aside extra either way, but I'd love for a pro to weigh in more definitively in on this. Have any clarification @DawnC ?

[DawnC · Accepted solution]

TurboTax defaults to using the method that produces the lowest estimate payment amounts.   The option to defer SE taxes will affect those estimate amounts (whether you choose to defer or not) if you use any method based on your 2020 tax bill.   Since the option is a one-time only situation, TurboTax did not change the default calculation method.   

Excerpt from Breaking down Form 1040-ES:    Take the tax you paid in the previous year. Calculate 90 percent of the tax you estimate you will owe in the current year. Compare the two, and take the smaller number. (For example, you paid $500 as tax the previous year. This year you estimate you will pay $1,000, and 90 percent of that is $900. The smaller of the two numbers is $500.) Now compare the total of any withholdings and credits you may have to this number.

The one-time only allowable deferral amount is reducing the tax you paid amount above, even though it should not.  Because of this, we recommend taxpayers use the other option - 100% of your 2021 taxes.  The way it is being calculated is producing too low of an estimate.  The estimated tax should be paid in addition to whatever amounts you deferred (or could have deferred) in 2020, but using the default method - a portion  of the allowable deferral amounts is being treated as an estimated tax payment for 2021 - but it is not - those are for tax year 2020.   

IRS How To Figure Estimated Tax    @LBrand

[LBrand]

@DawnC Thanks for your clarification. So from your message, I think I understand correctly that the estimated tax amount should have been based on the full tax due including deferred amounts. It is unfortunate that TT is deducting deferred amounts from the calculation as I see no situation where that's correct. I get that it's a one-off scenario, but it causes a lot of confusion and could at least have come with a warning message about deferred SI tax causing estimates to be incorrect.

All that said, I've already made the quarterly payment that TT suggested, which I now know is insufficient. What do I do now? I get that I can recalculate based on the correct amount to know what my quarterly payment should be, but how to best avoid penalties and also messes come tax time? Can I make another payment to bring myself up to the correct quarterly amount or will that mess things up for entering estimated payments next year? How are penalties calculated/assessed? I've never dealt with quarterly payments in TT, so I'm coming into this blind.

[T40]

I filed yesterday and realized I did the same thing and was very annoyed about it.  I plan on making up the Q1 ES tax underpayment balance on my Q2 payment.  Fortunately, if you do end up owing a penalty it will be relatively small and Turbotax will automatically calculate when you enter your 2021 estimated tax payments in the software.  

If you make the underpayment up in Q2 the simple formula for the penalty is : 

 UNDERPAYMENT AMOUNT   x   (NUMBER OF DAYS LATE / 365)   x   Interest Rate (Most recent rate was 3%)

If you are to make up for the underpayment in Q2 the penalty is under $5 per $1000 of underpayment (Based on the payment being 60 days late and assuming the rate is 3%).

If you are bored and want to know the details you can find them here:   https://www.irs.gov/pub/irs-pdf/i2210.pdf

[LBrand]

Thanks for this info, I'll look it over. However shortly after I made my initial post, I panicked, and made an extra payment rather than waiting until Q2. I suspect this is going to cause me problems come tax time but since I had no idea how much a penalty would be I erred on the side of caution and went for it. If anyone knows how best to deal with this come tax time with TurboTax, I would greatly appreciate the guidance. Essentially what I have is an insufficient (and slightly late) Q1 payment and then a supplementary payment that brings me up to the correct amount for Q1 made a few days later. All sorts of doing it wrong for me! Whee!

[DawnC]

It is not a big deal.   When you filed next year, you will be able to add the extra payment that you made.   @LBrand

When you enter the payments, TurboTax will default to 4 quarterly payments.   But you can edit the dates of those payments and add additional payments if you made them.