Estimated Tax Payments for Independent Contractors - 2020 Edition

November 30, 2020 3:03 PM

I’m an independent contractor. Typically I pay quarterly estimated taxes, but since the pandemic caused uncertainty and affected my ability to get work, I haven’t paid any estimated taxes yet this year. I’ve been able to earn some money working (about a third of what I earned in 2019), plus I’ve received unemployment insurance (with taxes withheld) to make up some of the difference. Should I make an estimated tax payment for Q4?? If so, how should I calculate the amount? I’m in California, USA.

I file along with my employed-and-gets-a-W2 husband as married filing jointly. His income will be a little less than last year due to a small pandemic pay cut, but not too different from 2019.

I usually earn most of my money in the last 4-5 months of the year anyway and I just had no idea what to expect this year - I was worried I wouldn’t earn any money and would go into debt paying estimated taxes. Luckily that hasn’t happened, but I’m just not sure if I should try and pay whatever I anticipate my total taxes owed will be all in the last quarter or what!

Also, not sure how the unemployment factors in. I said to withhold taxes each time I got a payment, but they only withhold 10% on that money.

Please let me know if you need more info. I can share specifics on numbers, for example, if needed. I acknowledge you’re not my accountant/lawyer. Thanks for any help.

posted by atruesock to Work & Money (2 answers total)

I am not a tax professional and have had other people help me with this in the past, but I am also a contractor and wanted to know how this works myself and this is what I have found:

Basically you add up your total estimated taxes for the year minus tax credits and multiply that by .90. Take either that number of the amount of taxes you paid in 2019, which ever is lower, and then subtract all withholding (including from your unemployment) and any tax refund money you carried over as an estimated payment. I do not really know how this works out for married people, it looks like you pool together both the taxes and then subtract both of the withholdings/estimated payments. So if your husband had more withheld than necessary and is going to get a refund, that would reduce the need to pay estimated taxes.

Then take that total estimated tax burden and divide that by 4. That's the amount you need to pay by each quarterly date, 3 of which are already gone. Penalties are assessed individually for each quarter, so the only penalty that matters now is your 4th quarter due in January. There appears to be an "annualized income installment method" that allows you to be more accurate with paying based on when you get income but I have not used it, in that case you would attach a form indicating which quarter you received income in, and you would only need to pay taxes for a specific quarter based on that.

To figure out the penalty, you first find out how much you underpaid per quarter and how many days late your payment is. Then you divide that by around 365 and multiply that by roughly 0.05. So if you are one quarter late on paying $1000 of estimated taxes, that should end up being $1000 * (90/365 or roughly .25) * (roughly .05) or $12.50. If you were 2 quarters late on paying $1000 you would have to pay two penalties, $12.50 for missing the first deadline and then $25.00 for missing the second deadline. So overall it looks like the penalties for underpaying do not start large, but can quickly add up over multiple quarters. If you haven't paid any taxes at all, you have a lot of penalty days accumulated so you definitely want to pay some, but you probably already owe some penalty from the previous quarters unless you use the annualized return sheet.

The actual federal rules are in Publication 505 it looks like, and the penalty is discussed in form 2210. Some states also require quarterly payments, I have no idea how that works but it's probably similar. I am not a professional and my numbers might be wrong so someone else will hopefully chime in.
posted by JZig at 5:25 PM on November 30, 2020 [1 favorite]

How you do usually do your taxes? If you do themself, using tax software, then there is usually a pretty simple way as part of your 2019 taxes to estimate your taxes for 2020.

If not, google for "free tax estimated 2020" It is pretty easy to do quick estimate now that you are have a good idea of what your total income will be for this year. I usually assume that the only the earned income changes - and just use the numbers from last year for everything else. If you had big number for your investments or other significant changes, adjust accordingly.Figure out the due on your adjusted income, subject the projected total withholding on your husband's salary and you will see how much you pay.

The last estimated tax payment for the year is due in January. I would overpay just a little so that when you file your taxes you get a small refund. If there is a penalty, the IRS will send you a letter to let you know how much it is.
posted by metahawk at 9:31 PM on November 30, 2020 [1 favorite]