The Internal Revenue Service is reminding taxpayers that today—January 15, 2021—is the deadline for making a tax year 2020 fourth quarter estimated tax payment. The goal of the press release is to prevent taxpayers who did not pay enough tax throughout 2020 from owing tax or a penalty during filing season.
The IRS says there are two methods for managing income tax payments in our pay-as-you-go system:
- Withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation in some cases. This is how most people pay most of their tax.
- Making quarterly estimated tax payments throughout the year to the IRS. Self-employed people and investors, among others, often pay tax this way.
Even if taxpayers choose to withhold tax from their paychecks throughout the year, making an estimated tax payment can help them avoid owing tax in April due to investment-related income or under-withholding. If a taxpayer suddenly owes tax despite their financial situation having not changed, it could mean they need to adjust withholding for the following tax year.
How do taxpayers determine the amount of tax they owe?
The IRS lists three resources for determining tax liability:
- IRS Tax Withholding Estimator
- Form 1040-ES, Estimated Tax for Individuals
- Publication 505, Tax Withholding and Estimated Tax
The IRS Tax Withholding Estimator is located at IRS.gov/Individuals/Tax-Withholding-Estimator, and that page lists some simple steps taxpayers need to follow prior to using the online tool:
- Gather the most recent pay statements for yourself, and if you are married, for your spouse too.
- Gather information for other sources of income you may have.
- Have your most recent income tax return handy.
Form 1040-ES, on the other hand, includes a worksheet that taxpayers can use to calculate what they owe, and Publication 505 has information that “can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations.”
How do taxpayers make estimated tax payments?
There are three government-provided methods for making an estimated tax payment online:
The IRS says that those who prefer writing a check will need to “make [it] payable to the ‘United States Treasury.’” More information can be found at IRS.gov/Payments.