IRS Makes Changes to Estimated Taxes for the Self-Employed in Response to Coronavirus

Learn what measures the IRS has taken to reduce the burden of estimated taxes for the self-employed.

Due to the economic downtown caused by the coronavirus (COVID-19) pandemic, Congress and the IRS have taken steps to reduce the burden of estimated taxes for the self-employed.

When you're self-employed, you must pay estimated taxes if you expect to owe at least $1,000 in federal tax for the year. Each estimated tax payment includes your income taxes and self-employment taxes (Social Security and Medicare taxes). Ordinarily, the deadline for paying estimated taxes each year starts on April 15 (first deadline), June 15 (second deadline), September 15 (third deadline), and January 15 of the following year (fourth deadline).

To help the self-employed during this time of economic strain, Congress and the IRS have taken the following steps.

Delay for First Two 2020 Estimated Tax Payments

The IRS has changed the deadlines for the first two estimated tax payments. They are now both due on July 15. This gives you three additional months to make the first payment and an extra month for the second. Although both payments are due the same day, don't combine them. Make each separately.

For 2020 only, estimated taxes are due on the following dates:

Income received for the period:

Estimated tax due:

January 1 through March 31

July 15, 2020

April 1 through May 31

July 15, 2020

June 1 through August 31

September 15, 2020

September 1 through December 31

January 15, 2021

Reduction in 2020 Estimated Tax Payments

In addition, the Coronavirus Aid Relief and Economic Security Act (CARES Act) enacted by Congress includes provisions that are aimed at reducing the estimated tax burden on self-employed people in 2020.

In general, estimated taxes that the self-employed must pay consist of federal income taxes, Social Security tax, and Medicare tax. The Social Security tax consists of a flat 12.4% tax up to an annual income ceiling. Net self-employment earnings (or employee wage income) over the ceiling are not subject to the Social Security tax. The ceiling for 2020 is $137,700.

The CARES Act allows you to defer 50% of your Social Security taxes until the end of 2021 and 2022. If you choose to do this, you must pay 25% of the deferred amount by December 31, 2021 and 25% by December 31, 2022.

Example: Joseph is self-employed and estimates he'll have $70,000 in net self-employment income for 2020. He'll owe $8,680 in Social Security taxes for 2020. He need pay only $4,340 with his estimated taxes in 2020, saving him over $1,000 on each quarterly payment. He'll have to pay $2,170 of the deferred amount on December 31, 2021, and the other $2,170 on December 31, 2022.

Determining How Much Estimated Tax to Pay in 2020

To calculate how much estimated tax to pay, you have the option of either:

  • paying the same amount in tax that you paid the previous year (but you must pay 110% of this amount if your net self-employment income is over $150,000), or
  • estimating what your income will be this year and basing your estimated tax payments on that.

If you expect your income to decline this year, don't base your estimated taxes on what you paid in 2019. Instead, estimate your 2020 income as best you can and base your payments on it.

To determine your net self-employment income, you first estimate the net income you've earned from your business. Your net business income includes all your income from your business, minus all business deductions allowed for income tax purposes. If you have more than one business, combine the net income or loss from them all. If you have a job in addition to your business, your employee income is not included in your self-employment income. Nor do you include investment income, such as interest you earn on your savings.

For example, if you expect your income to decline by 25% this year compared to last, reduce your estimated tax payments by 25%. If you defer 50% of your Social Security tax payments to 2021 and 2022, subtract this amount as well.

If you pay too little estimated tax during the year, the IRS can require you to pay an underpayment penalty. But, you won't have to pay such a penalty as long as you pay at least 90% of the total tax due for the year (not counting any deferred Social Security taxes). Moreover, the underpayment penalty is relatively small. For taxpayers other than corporations, the underpayment penalty rate is the federal short-term interest rate plus three percentage points. It is calculated quarterly. For the first quarter of 2020 it was 5% of the amount of the underpayment. It could well go down for future quarters in 2020.

Payments Based on Quarterly Income

Most self-employed people base their estimated taxes on their estimated annual income and make four equal estimated tax payments. However, you have the option of using the "annualized income installment method." This requires that you separately calculate your tax liability at four points during the year—March 31, May 31, August 31, and December 31—prorating your income and deductions. You base your estimated tax payments on your actual tax liability for each quarter.

This is a more complicated way to calculate your estimated taxes, but you might consider using it if you expect to have unusually bad first and second quarters in 2020 and expect business to pick up the rest of the year. Using this method, you'll pay much less estimated tax for the first two quarters than if you make equal payments each quarter.

Tax preparation software can calculate your estimated taxes for you. There are many online calculators you can use.

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