Estimated Tax - Paying Late vs Paying During Filing

[jb1781]

Hello Experts,

I need some help understanding about estimated tax penalty. I totally understand what estimated tax is and what it is for.

But where I need help with, is when you forgot to pay your estimated tax during the quarterly deadline.

I am specifically concerned about penalty and I need help understanding the special harbor or situations where you will not have to pay the penalty.

There are a few articles out there that mentioned exemptions. For example, if you are a US Citizen who fully paid past taxes on time during filing season will not incur a penalty fee for not paying the non-withheld tax portion on time quarterly. I also read about, if you have paid 90% of your outstanding tax in the prior year or 110% of your outstanding tax in the current year, you will also not incur a penalty fee. But I really struggle to understand these two statements. So, if you can help explain in layman's term, with an example hypothetical situation.

Finally, what is the best course of action if you missed payment on the quarterly due date?

Thank you very much.

[Anonymous]

Hi,

Here is an IRS article, you can use the IRS withholding estimator tool, to determine if you may owe or get a refund. https://www.irs.gov/individuals/tax-withholding-estimator 

In addition, you can use the TurboTax taxcaster tool, which I think will also be helpful to you:

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ 

The substantial understatement penalty is related to not paying the estimated tax payments on time. 

Here is pdf regarding IRS penalties: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.irs.gov/pub/irs-news/fs-08-19.pdf 

You can use EFTPS to make these payments electronically.  https://www.eftps.gov/eftps/ 

Here is an article for the due dates of the estimates:  https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2 

TurboTax will calculate the amount due based on what you have entered as estimates, and the IRS will view their records to see what estimates have been made, then will determine the appropriate balance due for that particular tax year. If you paid an amount due and/or have a payment plan, just make sure you keep a lot out for any notices and make those payments as soon as possible.

[mbpeddie]

Hello,

The statements about paying a certain percentage of your prior years tax liability or this years liability can be confusing so hopefully this example will clarify that for you. These are 2 different tests and you only have to meet one.

For example, you are required to send in quarterly estimated tax payments on earnings that are not subject to withholding such as self employment income.

Look at line 16 on your 2021 1040. This amount is the tax liablility for that year. As long as in 2022 , you made quarterly estimated payments equal to ( 100%) of this amount, you will not be subject to an estimated tax penalty.

Alternatively, look at line 16 of your 2022 1040. You need to have paid ( sent in quarterly payments) equal to at least  90% of your tax liabilty for this year.  If you paid 90%  of your tax liablility for 2022 , you would not have a penalty. 

This is because your situation changes from year to year and as long as you paid 100% of your previous years liability, even if your tax liability increases the next year, you wont get the penalty.

If you are late sending in a quarterly payment, make the payment as soon as possible. As long as you met the above conditions, you will not have a penalty.

[jb1781]

Thanks for the replies so far. So uhm, following up...I just have a clarification on these two paragraphs:

==

"Look at line 16 on your 2021 1040. This amount is the tax liablility for that year. As long as in 2022 , you made quarterly estimated payments equal to ( 100%) of this amount, you will not be subject to an estimated tax penalty.

Alternatively, look at line 16 of your 2022 1040. You need to have paid ( sent in quarterly payments) equal to at least 90% of your tax liabilty for this year. If you paid 90% of your tax liablility for 2022 , you would not have a penalty."

==

from @mbpeddie 

==

So, for 2022 filing of year 2021, what if I paid the remaining outstanding tax of 2021 in full during the 2022 tax return filing of 2021 before April 15, instead of actually having paid the quarterly estimates in 2021?

Same thing for the 2023 filing of year 2022, what if I paid the remaining outstanding tax of 2022 in full during the 2023 tax return filing of 2022 before April 15, instead of actually having paid the quarterly estimates in 2022?

Does this scenario also qualify for no penalty?

Thanks again for your attention and patience.

[mbpeddie]

No it would not .

The tax payments are based on a calendar/ tax year. All payments for 2021would need to have been made in 2021and all tax payments for 2022 would need to be paid in 2022. The only exception to this is the 4th quarterly estimated payment which is due January 15 following the tax year it is for. 

ie: your quarterly estimated payments are due April 15, June 15, Sept 15 of 2023 and Jan 15 2024 for the 2023 tax year. 

[jb1781]

I see. This helps. Thank you. So where can you find in your tax return document the amount of penalty you paid for paying late on estimated tax? Is that documented as a separate line somewhere?

[mbpeddie]

It is on line 38 of the 1040

[jb1781]

Thank you so much @mbpeddie . I think for my last set of questions, here they are:

1. Can you write an amount on the check that is higher than the amount specified in the TurboTax voucher when you send your late quarterly payment of estimated tax?

2. Also, I heard that you cannot lump sum pay all your late payments into one check? Is that true? So like if you had 3 late quarterly payments, you will still need to send 3 different checks?

3. Also, can you already advance pay with check now for the last quarterly payment that isn't due until Jan 15 of 2024?

Appreciate all the help and enlightenment. Very kind of TurboTax to have this event.

[Anonymous]

Hi again.

1. Yes

2.You can lump sum them into one check, but if it was for a "previous tax year," you still may be late on those payments.

3.Yes

Thank you,

John

CPA