Estimated Payments – Don’t Sweat The Small Stuff

Many have heard of the confusion around estimated payments for 2021 and how the change of the filing due date for 2020 has not affected the due date for the first estimated payment of 2021. Even though the due date for filing a 2020 tax return was moved to May 17, 2021, the due date for the first estimated payment for 2021 is still April 15, 2021.

The bigger point of confusion is how the IRS will treat an overpayment from the 2020 tax return that is applied to estimated payments for 2021. It appears that an overpayment from 2020 carried to estimated payments to 2021 will be considered 30 days late since the IRS will consider that overpayment as having been made on 5/17/2021 no matter when the payments were actually made or when the return was actually filed. This has caused quite a stir among the tax community as well as clients who are concerned about making a timely payment.

But is this worry all about nothing? Probably for most clients, the answer is “yes”. The “penalty” for not making a timely estimated payment is only 3% on an annualized basis. If you don’t make your estimated payment until 5/17/2021, you are looking at a penalty of 0.25%. In other words, if your estimated payment is $5,000 and you make that payment on 5/17/2021 instead of 4/17/2021, that will cost you a whopping $12.50, at the most. It is very possible that, when your 2021 tax return is filed next year, your actual required payment was less, and the resulting penalty will be less.

The only exception to not worrying too much about being one month late is if you are on an installment agreement for back taxes with the IRS. If the IRS follows through and considers any payment made after 4/15 and 5/17 as “late”, including the application of an overpayment from 2020, technically they could have an argument for invalidating your installment agreement and forcing immediate collection of your balance due. In this case it is best to make your estimated payment on or before 4/15/2021.

For everyone else, unless your estimated payments are approaching 6-figures per payment, the extra time spent calculating a payment or generating the forms before May 17, 2021 is probably not worth the small amount of penalties that you may, or may not incur.