The delaying of Tax Day until July 15, 2020, was initially a huge relief for small business owners. But the delayed last-minute tax crunch is now upon us. And it comes with an ugly, unwelcome surprise for self-employed business owners and 1099 contractors.
Independent contractors and self-employed workers are required to file and pay not only all of their 2019 taxes on July 15, but they must also make their first and second quarterly tax payments for 2020. That’s a potentially extraordinary tax bill due all at once for many people who’ve seen their income decimated under the coronavirus economic downturn.
On July 15, many entrepreneurs could find that they’ll owe half their estimated 2020 taxes in addition to a full 2019 tax filing and any taxes on that bill they haven’t paid yet. Here’s how to tell whether you’re one of those self-employed workers or independent contractors who’ll be on the wrong end of a big tax bill.
According to the IRS, self-employed people make up most of the tax filers who are required to make quarterly tax payments. A few other taxpayer classifications, including investors and retirees, also have to pay taxes quarterly—that is, if a “substantial portion of their income is not subject to withholding [taxes].”
In a normal year, quarterly taxes for the self-employed are due on April 15, June 15, September 15, and January 15 of the following year.
But 2020 is not a normal year. This year, the first 2 quarterly tax payments will be due in a lump sum on July 15. The self-employed and those other groups mentioned could owe half their 2020 taxes on July 15, plus any unpaid 2019 taxes from the previous year’s filing they’re also required to submit that day as if it were April 15.
Generally speaking, the IRS expects you to “pay as you go” on your taxes. That means you either have your taxes withheld, like people who are paid on a traditional company payroll system, or you’re a sole proprietor expected to pay your estimated quarterly taxes 4 times a year.
The key word there is “estimated.” Estimating taxes is not an exact science, and you might overpay and get a refund just like many employees at traditional companies do. And while the process is a chore, you can calculate your estimated quarterly taxes online with an IRS Form 1040-ES.
Anyone who’s filed taxes before probably knows you can easily get an extension on filing your taxes. But you still owe that money, and it will start accumulating interest costs on July 15, regardless of when you file. Plus, you’ll face a late penalty if you’re not paid up on your 2020 estimated taxes by that date.
And none of this takes into account your state taxes. The IRS has said that the July 15 extension “does not apply to state tax payments or deposits or payments,” but many states delayed their deadlines too. Forbes has a list of state tax deadlines for all 50 states that explains if your state has changed any tax due dates in 2020.
The IRS is offering one more tax relief exemption, but it’s only available to businesses that are pretty well paid-up on previous years’ taxes or have already made payments on their 2020 quarterly taxes. The IRS is forgiving late tax payments for taxpayers “owing less than $1,000 at tax time or by paying most of their taxes during the year.”
And it’s a high bar of tax compliance for many small businesses to meet, especially under the current difficult circumstances. The IRS advises that “Generally, for 2020 that means making payments of at least 90% of the tax expected on their 2020 return.”
If you still owe federal taxes, it’s easiest to pay directly using your bank account, credit card, or debit card. There is an IRS online platform that lets you pay your taxes online securely via these methods.
Paying your taxes is obviously a difficult situation right now, given the staggering loss of revenue for so many self-employed and 1099 workers. Some entrepreneurs will be faced with a difficult choice between paying their full taxes, paying critical everyday bills, or just putting food on the table. Putting food on the table and other urgent bills will win in some of these situations, despite the late payment consequences.
But if you’re a rideshare driver, freelancer, doctor, dentist, translator, or part of any of the myriad industries that now often do business as independent contractors, you may have a significant tax filing and payment obligation on your hands. This may be the right time to consider online bookkeeping software that can help you prepare your taxes.