Why are 2021 Estimated tax payments reduced by SE Filer tax deferral - whether it is taken or not?

[Financial Dadvisor]

Hello,

When looking at my 2021 estimated payments the 100% amount due on line 4 of the Estimated Tax Payment options is thousands of dollars less than my tax on line 24 of my 1040.

After doing some research, line 24 on 1040 is being reduced by line 26 from Schedule SE-T the maximum deferral of SE tax payments.  It uses this amount to reduce my 2021 tax estimated payments regardless of whether I am taking the tax payment deferral. 

If you take the SE tax deferral it goes to line 12e of schedule 3. 

The instructions for 2021 Form 1040ES instruction for figuring your 2020 tax, page 8 - bullet #4, does not state that 2020 taxes can be reduced by line 12e of schedule 3 when determining your 2021 estimated payments.

I do not want to be penalized for underpaying my tax estimates for 2021.

Is this an error in the software?

[MaryM428]

The software is calculating an estimate of the amount needed to avoid penalty.  You can increase of decrease that estimate based on your expected 2021 income.  If you are not taking the SE deferral, then you can increase your payments by the correct amount for your situation.

 Generally, most taxpayers will avoid underpayment penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. 

IRS Estimated Taxes

[Financial Dadvisor]

Hello,

I am trying to avoid the underpayment penalty for 2021 by paying 100% (110%) of my 2020 tax. This is known as the prior-year exception. Based on my research,  the tax amount on line 24 of form 1040 should not be reduced by the 2020 tax SE deferral as suggested by Turbo Tax to determine the prior-year exception amount.

As you suggested, I am going to override the 2021 estimate amount suggested by Turbo Tax by adding back the amount on line 26 of form SE-T.

My tax liability for 2021 should be significantly higher than my taxes for 2020 and I want to be 100% certain I am within the prior-year exception.

[johnonthecape]

This topic is unclear to me too.  I've always assumed the estimated tax penalty can be avoided by paying 100% of the prior year total tax liability.  But TurboTax...and others...assert that the prior year amount reduced by the deferred SE amount will still meet the no-penalty requirement.  Afterall, 50% of the SE deferral is to be paid in 2021 by December 31st.  But the other half not until 2022.  Here's a pasted FAQ from a recent IRS bulletin, which seems to me to be subject to interpretation.  It sure would be helpful to get definitive guidance on this topic! 

IRS FAQ #22. 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?

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.

Can an expert please clarify?