What Happens If You Forget To Make Your Quarterly Estimated Tax Payments?
Most W2 employees will find this post boring, but 1099 contractors, business owners, and the self-employed know all about the importance of paying their quarterly estimated taxes. You see, the IRS prefers to be paid quarterly throughout the year rather than all at once at the end. This means that in most cases, you can’t simply wait to pay what you owe until you file your taxes in April.
Paying Your Quarterly Estimated Taxes Is Easy
While annoying, actually making your quarterly estimated tax payments online is really simple once you get things set up. First, you’ll need to sign up for the Electronic Federal Tax Payment System (ETFS). Once you’ve signed up, the IRS will send you a packet in the mail with an electronic pin and instructions for setting up an internet password. I’m not entirely sure why this couldn’t all be done securely in real time over the internet, but it takes a week or so to get your packet in the mail, so be sure not to wait until the last minute to sign up.
If you don’t want to use the internet for some reason, you can also make your quarterly estimated tax payments through the mail. Most tax software such as TurboTax will calculate how much you should pay every quarter and even print out quarterly tax payment coupons you can mail in with your check.
What Happens If You Forget?
If you forget to pay your estimated quarterly taxes, you may owe a underpayment penalty to the IRS. There are a series of safe harbor rules that protect you from penalties if you meet certain conditions.
You qualify for safe harbor if you meet the following criteria:
- You had no tax liability last year – If you didn’t owe anything last year, you are safe from the underpayment penalty this year. Of course, if you underpay this year, you are vulnerable next year.
- Your underpayment is less than $1,000 - If the amount of your underpayment is less than $1,000, you’re safe. The IRS isn’t worried about such small amounts. Example: if you end up owning $5,000 total and only pay $4,500 over the course of the year, you’re safe because $500 is less than $1,000.
- You paid 90% of more of your actual current year tax liability - This rule seems pretty redundant in light of the $1,000 rule above, but you are generally safe from penalties if you end up paying at least 90% of what you end up owing. Example: you end up owing $10,000 to the IRS this year and have paid at least $9,000 in quarterly estimated taxes throughout the year. If you only paid $8,999, however, you’re out of luck.
- You paid at least 100% of what you ended up paying in taxes last year (110% if your Adjusted Gross Income is $150,000 or greater) - The easiest way to avoid underpaying is just to pre-pay at least what you paid last year in taxes. Assuming your income didn’t drop significantly, this shouldn’t be too difficult. If you do this, you’ll be safe from the underpayment penalty regardless of how much you make this year.
Even if you don’t meet the above safe harbor rules, you might still be able to avoid and underpayment penalty if you meet either of the following conditions:
- Your failure to make sufficient estimated tax payments was due to a natural disaster, disability, or some other extenuating circumstance. This one leaves a lot of leeway.
- You either retired (after age 62) or became disabled the previous year and the underpayment wasn’t due to willful neglect.
So You Owe A Tax Underpayment Penalty
Despite your best efforts, suppose you owe an underpayment penalty. What do you do? You’ll need to download Form 2210 (opens as pdf) to figure out how much you owe. As with everything having to do with the IRS, the calculation isn’t always completely straightforward. Or, if you happen to use an accountant to do your taxes, make them figure it out. It’s probably their fault, anyway. Good luck!