Under normal circumstances, you are very careful with meeting your deadlines - but this time around, you forgot to pay quarterly estimated taxes. What happens if you forget to pay your taxes? Is there anything you can do to make up for your mistakes?
Nothing too major will happen if you miss a day or two. Remember that the more days pass, the higher the quarterly tax penalty rate will be. This article will tell you everything there is to know when forgetting to make the estimated tax payments.
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In many cases, people forget to pay estimated tax payments simply because they did not know they had to make that payment in the first place. This is why people must know whether they need to pay quarterly tax or not.
Self-employed people or individuals with a role in a business (i.e., partner, sole proprietor or shareholder in an S corporation) need to make quarterly estimated tax payments. This applies mostly if they expect to owe quarterly taxes going past $1000 by the time their tax return is filed.
A corporation will have to file quarterly estimated tax if they believe they'll owe more than $500 by the time their tax return is filed.
Estimated tax payment is made quarterly, on a schedule that was set by the IRS. If you are a self-employed individual that earns higher amounts of money from various investments, then you'll be expected to make estimated tax payments.
If you forget to pay your quarterly estimated tax, the IRS will proceed to throw interest and penalty charges your way. If you forget, it doesn't mean they will forget as well.
In the beginning, the IRS will probably dock a tax or somewhere around 5% of what you owe. With each passing month where you don't pay your quarterly estimated tax, the percentage will grow even more.
The maximum penalty limit they may charge you is 25% - but don't believe that if you reached that limit, you are in the clear. If you leave it that way and show no interest in actually wanting to make your estimated tax payments, you may eventually find yourself in trouble with the law.
Quarterly estimated tax payments need to be filed by their due date. If you don't pay by the deadline, you risk a penalty for missing said due date. You may have missed it just a day; you'll still receive a penalty for it. This is why you may want to keep your taxes as organized as possible.
Keep the deadlines for when quarterly taxes in mind. Paying early is much better than paying late. Here were the dates for the 2020 tax year:
The IRS is very serious about these dates, and they expect you to pay estimated taxes by that time without fail. The only exception will be if the date falls on a bank holiday. In that case, the payment needs to be done on the first day when it's not a holiday or a weekend.
Many people make the mistake of simply leaving it for the next due date, but here's where it comes back to bite them: the more they push it back, the more they will have to pay.
If you don't pay quarterly, the payment won't be reset by the next quarter. It will only just grow. So, by the time the next quarter comes around the quarter, you'll probably have a penalty so big, you'll barely be able to handle it.
Technically speaking, the 2022 due date for quarterly estimated taxes has long since passed. The last one was January 15, 2023 - so, if you missed that one, you're too late to pay your estimated taxes in their normal circumstances.
The key phrase here is "normal." While you are too late to pay the sum that you originally owed, you are not too late to pay your taxes overall. You'll just have to pay the tax along with the penalty.
The more you put the tax payment off, the bigger your penalty will become. This is why you need to make your estimated quarterly payment as soon as you remember it.
There is one small case where you may skip the estimated tax payment - but not for long, and under specific circumstances. For example, you may skip the quarterly tax payment for January 15th if you file for your tax return and make all your tax payments by February 1st.
That being said, even if you can, it doesn't mean that you should. The majority of the people don't have all of their tax paperwork and forms ready by February 1st. So, to be safe, if your tax payments are due by January 15th, then you might want to make your estimated tax payment by that time.
Also, even outside those circumstances, nothing is stopping you from skipping a payment. It also doesn't mean it will benefit you. Skipping outside the given "window" will lead to a penalty, and the more days pass, the more you'll wish you never skipped it, in the first place.
Determining a penalty income tax amount might be rather complex to do on your own. This is why you should not try to make this sort of calculation by yourself. This is exactly why the IRS allows you to leave a blank space in the box for quarterly tax payments.
By doing this, the IRS will do the calculations for you, and they'll send you the bill. You can also calculate it by yourself if you are confident in your accounting skills.
To make the calculations yourself, you'll need to use Form 2210, also known as "Underpayment of Estimated Tax by Individuals, Estates, and Trusts." On that form, you'll be able to find the penalty taxes for the previous year (in this case, 2021).
Since the 2022 tax year is not yet over, we do not have a Form 2210 for 2022. By the time that form comes about, the rate may be different.
If you failed to pay anything at all, then you'll owe 4% of your underpayment, times the number of days that pass between the day you were supposed to make the payment. Divide that number by 365 (or the number of days that particular year has if it's a leap year).
Here's a tricky circumstance: you did make payments, but the problem is that you did not pay enough. In this case, the situation can get more complicated.
In this situation, there will be some complicated calculations between what you paid and what you failed to pay, underpayments that were outstanding, various penalties to consider.
It can be rather difficult for the average taxpayer to figure out, which is why the IRS allows you to leave that estimated quarterly tax box blank. It's best to do this rather than messing it up and paying less than you owe - ending up with even more penalties. Don't fret over overpaying estimated taxes, as you'll just get a refund at the end of the year.
Ultimately, you can also get a self-employment income tax software to make those calculations for you. You can enter the inputs, and the software will automatically calculate things for you. You'll probably have to pay for a verified, accurate software, but usually, the results are worth it.
As a person who forgot to pay quarterly estimated tax, this question probably crossed your mind at some point: can my estimated quarterly tax penalties be waived by the time I file for a tax return?
In most cases, if you simply forgot to pay your estimated quarterly tax, then that's that: you'll have to pay the penalty. However, for people that are very lucky (or just surrounded by circumstances), there may be a silver lining.
Here are the cases where your penalty may be waived:
Commonly, estimated quarterly tax penalties are reduced or waived if you did not receive your income evenly throughout the tax year. In these circumstances, the IRS allows you to annualize your income and make different, unequal payments.
Check with Form 2210 to see if you fit the bill and if you can waive your taxes this way. In most cases, you have all the circumstances there to tell you whether your situation is appropriate or not .
The IRS may be strict, but it's not unreasonable. A self-employed person may be exempt from their estimated tax payments if the delay was caused by a disaster. In these cases, it would be understandable if you forgot to make a payment or simply did not have the funds by the due date.
For example, let's say that when you were supposed to make your income tax payments, you were in a hospital bed. Depending on your situation, the last thing on your mind was to make your estimated tax payments - provided you were conscious enough for that.
Or if you were self-employed and your home office burned down, you had no way to meet your income quota. Making your quarterly payments for estimated tax could be waived this way because after all, you lost your method of making money.
There are also other accepted situations in which your self-employment tax for this tax year (and possibly the rest) may be waived. Here are these circumstances:
Obviously, in case these circumstances happen to you, then you need to bring proof. For instance, if you were hospitalized or became disabled, then you need to bring your medical records.
Anyone can forget to pay their self-employed tax throughout the year. You shouldn't - but still, it happens. Here are the steps you should take:
The moment you realize you forgot to make your due estimated tax payments can be scary. You know that business is slow, and the awareness of the penalty does not help you either. Looking at the envelope from the IRS, you might want to pretend that it doesn't even exist and just leave it there.
That being said, at this point, the best thing you can do is keep your cool and take action. Breathe, open the envelope, and assess the situation. What's done is done, and you have to do what you can now.
Ideally, you should make the full payment, including the penalty. However, if you can't pay the full amount, simply pay as much as you can. Sure, you'll still be charged interest for the remaining money, but by the time you make the next payment, the interest will at least be smaller.
After you file your tax return, you might want to work with the IRS. They are expected to enforce the tax law throughout the year, but they are reasonable. They collect, but they're not out there to ruin you. If the circumstances permit it, they may even be able to waive your penalties or fees.
Forgetting to pay your estimated tax is not something you should make a habit of. However, if it happens, don't panic. Start making payments as soon as you remember. If your plate is clean by the time you file for a tax return, there should be no problems following you in the next tax year.