IMPORTANT! You May Owe a Tax Payment this Month

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You may owe the IRS a tax payment for your 2020 tax return and not know it. Most Americans have income taxes withheld from their paychecks, with their employer sending a tax payment to the IRS on their behalf. This year, however, many more Americans will have to write Uncle Sam a check to pay a portion of their 2020 taxes on or before July 15. You may be one of these people!

Who Needs to Pay Now!

You may need to make a payment if one of the following situations applies to you:

Paychecks are Under-Withheld

Your employer withholds a portion of your paychecks for income tax purposes, then submits a payment to the IRS on your behalf. The amount that is withheld from your paychecks, however, may not cover your entire tax liability, resulting in you needing to write the IRS a check. If you're not withholding enough, ask your employer to increase the withholding amount from your future paychecks so you don't come up short again in the future.

Unemployment Compensation Paychecks are Under-Withheld

Unemployment compensation is subject to federal income tax and subject to income taxes in several states. While some unemployment benefit checks withhold a percentage of your payment for income tax purposes, you may need to pay more in taxes than is being withheld.

Self-Employed Workers

Unlike employees, self-employed workers don’t have income tax withheld from pay and must make four estimated tax payments over a period of 12 months. Self-employed workers include gig economy workers, freelancers, S corporation shareholders and partners in a partnership.

Retirees

You may owe tax on Social Security benefits, as well as income from investments distributed to you or other unearned income. A portion of pension plan distributions may be withheld, but many times the amount withheld does not cover your entire tax liability, resulting in an underpayment.

Sold a Major Asset

You may owe tax after selling an asset that results in a large capital gain, such as a house, or from the sale of securities.

Receive Alimony

If you’re being paid alimony under a divorce decree entered into before 2019, the payments constitute taxable income to you. Alimony from post-2018 agreements, however, are not taxable.

What You Need to Do

Estimate your total income for 2020, then calculate your total 2020 tax bill and divide it by 2. Compare this amount to how much has been withheld from your paychecks, unemployment benefits and any other payments you've made to the IRS. If you're short, consider making an estimated payment by July 15 to make up the difference. This payment is made with Form 1040-ES.

If you do not make this payment on time, the IRS may impose a penalty plus interest on top of the underpaid taxes. Fortunately, you can avoid a penalty by paying at least 90% of the current year’s tax liability or 100% of the prior year’s tax liability (110% if your adjusted gross income for the prior year exceeds $150,000).


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Disclaimer

The information in this article is written as accurately as possible and to best of the writer's knowledge. However, there may be omissions, errors, or mistakes. Because of this and changes in circumstances, the information in this article is subject to change. This article is for informational purposes only and should not serve as professional, financial, medical, emotional, and/or legal advice. Readers may rely on the information on this article at their own risk, but they should consult a CPA, financial expert, or other professional for advice. Givilancz & Martinez, PLLC reserves the right to change and handle this article series, and therefore, may remove or alter any part of this article or the comments section. Any comments inserted by readers are not the responsibility of G&M PLLC and do not represent the thoughts or ideas of G&M PLLC.