I have a fairly unusual situation that I thought I understood, but I just filed my 2019 taxes this afternoon and now I am not so sure that I am doing the right thing.
For context: I have a full time W-2 job that takes care of my witholdings from that job. However, in addition to that I have received some money, in two payments. This is not contractor/gig work, no work was performed to get this money, so not a job and no payroll taxes are due.
First payment was a lump sum payment in December 2019. I didn’t pay quarterly taxes on it because the penalty amount was very low and I just didn’t have it together to figure it out. It’s been taken care of and paid today with my 2019 tax return.
Second payment was another lump sum payment in April 2020. This payment is significantly more money and the taxes due are not insignificant. It will, however, be the last 1099-misc income that I will get this year. I was planning to pay estimated quarterly tax by July 15 on this lump sum payment so that I do not have to think about any underpayment penalties and then move on.
However, when I filed my tax return the forms included quarterly payment vouchers, because I owed more than $1,000 in my 2019 tax return. These quarterly vouchers have specific dollar amounts listed on them. The question is - can I simply pay the estimated tax on the lump sum received in April 2020 by July 15 and call it good? Or do I have to submit the payment amount listed on the quarterly payment vouchers for the remaining 3 quarters of the year to avoid penalties, and then recuperate that money back on my 2020 tax return?
Yes! As long as you know that it is a lump sum and can prove it. You can either annualize the amount and make an estimated tax payment in quarters or an increased estimated tax payment for the quarter in which you get the lump sum. You would have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts with your tax return to show the IRS that your uneven estimated payments match up with the income that you received unevenly over the course of the year.
You also can just increase the withholding at your day job if you like! There’s no magic that requires that you have to use the quarterly payment vouchers.
(also quarterly estimated payments for Q1 aren’t due until July 15th now due to COVID19.)
Totally makes sense! What does the IRS consider proof though? I literally just have a wire transfer and the person sending me the transfer said he would not provide me a 1099 until January when I asked about it. The payment is equivalent to about half my annual income, so having my W-2 employer withhold extra probably won’t work (and in these times, I am cautious about the idea that I will still have a job by EOY).
That’s fine! I guess I shouldn’t say “prove”. The IRS usually assumes that filling in a form is proof (they have a warped idea of proof) unless you get audited. If you are paying quarterly taxes for the full amount of estimated quarterly taxes in one quarter, and then it’s clearly linked to a lump sum payment (based on wire transfer date, etc), then you should be fine. If you use the annualized income installment method, you must check box C in Part II of Form 2210. Also, you must attach Form 2210 and Schedule AI to your return.
Essentially the IRS is relatively agnostic about when you pay the estimated tax payments during the tax year, as long as you are paid up based on what 90% of what you should owe or 100% of the previous year’s owed tax. They make the assumption that your income won’t vary a ton year to year, and have you estimate based on previous year’s owed income. Since this tax payment is going to be > than what you owed in previous year, I would pay using the annualized method. Because it’s likely that using your little quarterly estimated tax vouchers won’t withhold enough.
From the IRS on Amended Payments
To change or amend your estimated tax payments, refigure your total estimated tax payments due (see the 2020 Estimated Tax Worksheet). Then, to figure the payment due for each remaining payment period, see Amended estimated tax in chapter 2 of Pub. 505.
No need to respond, but make sure this doesn’t fall under “gift”. If it is a gift, it is not taxable to you but to the person sending it to you if it’s bigger than the tax-free gift limit ($15,000 per year).
I think i get it (and no this is definitely not a “gift”)…but my brain feels fried when I look at the IRS forms so I printed them out and will look at them in a few hours lol. So much for getting everything squared away quickly so I don’t have to think about it again! Appreciate the help though =)
Can I bring up this question on the podcast? I think it’s an interesting question to explore and maybe having to write a script will make my explanation more accessible than my hastily written forum post.