HELP! Unexpected bonus income and underpayment of taxes. What can I do?

[johnny_in_CA]

Hi everyone,

I have a "champagne problem." My company paid us our 2018 bonus in CY2019. This is the norm. Then last week, for some reason, paid us our 2019 bonus also in CY2019! Add to this, there was a mid-summer smallish bonus. The three payments were Jan 2019, August 2019, and December 2019. 

All three were run as 1099's and so no withholding. I basically now face a severe and unintentional underpayment situation, and not only looking at a large tax bill but also a severe underpayment penalty.

Given that today is 12/28/2019, what are my options? Can I make an estimated lumpsum payment to the IRS before 12/31/2019 (or an extension date, if someone can tell me) and avoid this penalty?

I have never faced such an income volatility before. My income is supposed to be predictable +/- 5%. 

Thank you very much.

[Critter · Accepted solution]

Ok ... first take deep breath ... this is not the end of the world.  You have until 1/5/20 to make an estimated payment to the feds & state if needed.  So let us look to see if it is needed ... did you have enough withheld to cover 100% of the 2018 tax liability ... if so your problem is nil. 

To avoid an underpayment penalty, you should make estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
- 2. You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your current year’s tax return, or 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

IRS payment website for Direct Pay for the estimated tax payment - https://www.irs.gov/payments

What I have a big issue with is an employer paying bonuses outside of the payroll system ... that is illegal in most cases. 

[Critter]

https://ttlc.intuit.com/community/taxes/discussion/how-can-i-file-an-employer-issued-1099misc-for-a-...

[johnny_in_CA]

Hi Critter,

Thank you for your help. Appreciate you pointing me in the right direction.

I can answer YES to both (1) and (2). To quantify this a bit: Sum (all bonuses in 2019) = ~1.5*W2 comp. 

Now, decomposing this a bit, I did not have enough withheld to cover two extra and unexpected bonuses (Aug 2019, Dec 2019).  My deduction situation isn't changing from FY2018 to FY2019, and I did a bit of planning to account for the Jan 2019 bonus. But since I have this extra burden of the Aug and Dec 2019 bonuses, my eventual tax liability is going to far exceed conditions in (2). 

I 100% agree with you re: employers paying outside the payroll system. You can guess the reasons why.

Also, suddenly changing the trend and paying two bonuses in the same year for two different performance periods, just so the majority owner can avoid having the firm income show up on their personal income statement for FY2019.....not good. 

Having said all this, I am grateful that if I have to deal with financial problems, these are the problems I'm dealing with. 

Thanks again.

[Critter]

So if you are not going to call them on this make a 4th quarter estimated payment by 1/15/20 to reduce the possible penalty  and be prepared to complete the 2210AI in the program to divide the income into the quarter's you earned it.