Changes to Estimated Tax Rules – ATTN: Self-Employed

October 6, 2009 | Subscribe to our RSS Feed

For tax years beginning in 2009 only, the American Recovery and Reinvestment Act of 2009 (ARRA) reduced the amount of estimated tax that individual taxpayers with income from small businesses must pay.

Taxpayers who do not have their taxes withheld (or do not have enough withheld) may have to make estimated tax payments. Self-employed taxpayers generally will have to pay their taxes this way. Taxpayers may also have to pay estimated tax if they receive income such as dividends, interest, capital gains, pensions, gambling winnings, rents or royalties, because there is generally no withholding on such amounts.

Under IRC § 6654, a taxpayer must pay estimated tax if both of the following apply:

The taxpayer expects to owe at least $1,000 in tax for the current year after subtracting any withholding and credits (and owed tax in the preceding year); and The taxpayer’s withholding and credits are expected to be less than the smaller of: (1) 90% of the tax that the taxpayer expects to owe or (2) 100% of the taxpayer’s tax liability shown on the prior-year’s return (110% if the prior-year tax liability was greater than $150,000).

Special Rule for 2009

For 2009, in computing estimated taxes, a qualified individual uses 90% of the tax shown on the individual’s return for the preceding year instead of 100% (IRC § 6654(d)(1)(D)(i) as amended by ARRA § 1212). For purposes of this special rule for 2009 tax years, “qualified individual” means any individual:

Whose adjusted gross income shown on his or her tax return for the preceding tax year is less than $500,000 ($250,000 for a married taxpayer filing separately); and Who certifies that more than 50% of the gross income shown on his or her tax return for the preceding tax year was income from a small business.

For this purpose, income from a small business means income from a trade or business with an average of fewer than 500 employees for the calendar year ending with or within the individual’s preceding tax year.

When Estimated Taxes are Due

Estimated tax payments are due four times per year: April 15, June 15, Sept. 15, and Jan. 15 (or the next business day if the due date is a legal holiday or weekend day). The estimated tax payments do not have to be the same amount in each period. If a taxpayer does not pay enough tax by the due date of each of the payment periods, he or she may be charged a penalty when filing his or her income tax return even if a refund is due.