1099 for short term project - when do I have to pay estimated taxes?

[rlwremo]

Hi,

I've seen information on bits and pieces of my situation and think I know the answer but would appreciate help / clarification.

  I was a W-2 employee for all of 2019 and received a refund, therefore had no estimated taxes required to pay in 2020.

I was a W-2 employee for part of 2020 (laid off in May). 

I did receive unemployment in 2020 and recently (Sep 15) started a 1099 job that I am still working at.   I have not paid any estimated taxes on the 1099 income yet as honestly I thought some other fulltime jobs would come through before now.  However the 1099 job is going well and I expect to be brought on-board early in 2021 (maybe March) as a W2 employee.

I know I owe taxes on the unemployment and the 1099 amount for 2020. 

My understanding from helping others with their taxes (they are 1099's for the entire year) that they pay quarterly taxes, with the final / last payment of the tax year being due on Jan 15 of the calendar year after the tax year (e.g. final estimated quarterly tax payment for 2020 is January 15, 2021).

Since I expect my job to be converted to a W2 in 2021, I don't want to be saddled with an extremely large quarterly payment being expected from the short term situation in 2020.

I think that I have 2 scenarios:

1) I just file my taxes like I normally do, in 2021, without making an estimated payment for the 1099 and unemployment income and just have a large tax bill in April of 2021.

2) Sometime before January 15, 2021, I make a reasonable estimated payment towards what I think I will owe (based on doing my preliminary return in TurboTax; I won't have all the information I will need by Jan 15 to fully do and file my return).  

Here is my question (or questions).   in #1 above, will I have a penalty because I didn't make any estimated taxes on the untaxed income?  

I guess same applies to #2, if my "estimated" payment is insufficient, would I owe a penalty on top of what I pay when I file my taxes by April 15?    Or is there no penalty in either scenario because in 2019 I was a fulltime w-2 employee and no quarterly estimated payments required during the first 1/2 of 2020? The benefit I see of #2, even if there is no interest or penalty due, I would significantly decrease the automatic calculation of my 2021 quarterly payments. 

Oh, and if my Date of Jan 15 above is incorrect (i.e. I need to make a payment by Dec 31, 2020 for it to count) please let me know.

Thank you in advance and sorry in advance for any over-complications I've created in my question. 

Remo.

[Opus 17]

#1, yes you could possibly be assessed a penalty, depending on the amount of tax due and how much tax you paid last year.

#2, yes, even though you make a timely estimated payment, if the estimated payment is still significantly under what you owe, you could be assessed a penalty.

The payment deadline for income earned from Sept 1--Dec 31 is January 15, or January 31 but only if you file your return by January 31 and pay in full at that time.

You can avoid an underpayment or late payment penalty as long as the amount you owe when you file your return is less than $1000, or the amount you pay to the IRS during 2020 (by withholding and estimated payments) is at least 100% of your tax bill from last year (or 110% of last year's tax bill for certain high income taxpayers). 

Estimated payments owed for 2021 are based on your 2021 income.  Turbotax will give you a figure using 2020 income but in your complicated situation, it will provably be inaccurate.  Your first 2021 estimated payment will be due April 15, for income paid between Jan 1-March 31.  

[rjs]

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@rlwremo wrote:

in #1 above, will I have a penalty because I didn't make any estimated taxes on the untaxed income?  

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Yes, a penalty and interest.

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I guess same applies to #2, if my "estimated" payment is insufficient, would I owe a penalty on top of what I pay when I file my taxes by April 15? 

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Yes, a penalty and interest, if your estimated tax payment is insufficient.

You will not owe penalties and interest if your total withholding in 2020 is at least 90% of the total tax on your 2020 tax return, or 100% of the total tax on your 2019 tax return (110% if your 2019 AGI was more than $150,000), but it doesn't sound like that will be the case.

[NCperson]

@rlwremo  - one twist, it may turn out that the tax you owe is less than you think!  And it comes down to how big the difference was between your W-2 wages and the unemployment payments.  

your employer was withholding tax earlier in the year assuming that rate of pay would continue for the entire year.  But of course, it didn't.  

You could be in a lower marginal tax rate for the year but the W-2 wages earlier in the year were withholding assuming a higher tax rate.  

You'd have to work out an estimate to figure this out, but I wouldn't assume just because there was no withholding on the unemployment necessarily means there is a big tax bill coming - maybe and maybe not!

[rlwremo]

Thank you all for your replies.  Very helpful!!