Small business owners, 1099 workers, and those with investment income must remember to make quarterly estimated tax payments to the Internal Revenue Service. If you fail to make payments on time or underpay the amount you owe, you run the risk of a penalty. Due to the frequency of estimated payments and the natural ebb and flow of business, it’s not uncommon for taxpayers to miss a deadline or come up short on their payment. When this happens, Form 2210, Underpayment of Estimated Tax, comes into play.
What Is Form 2210?
Form 2210 applies to individuals, estates, and trusts when they file their corresponding income tax return for the tax year. The IRS uses Form 2210 to calculate the penalty liability for those who have either made an underpayment or failed to make a timely payment regarding their estimated taxes throughout the previous tax year. The end goal of Form 2210 is to determine any penalty amount owed to the IRS by comparing total estimated tax payments to the required levels of payments according to your income level.
Who Needs to File Form 2210?
The IRS calculates penalties for individuals, estates, or trusts that have failed to pay or underpaid their taxes. However, taxpayers can use Form 2210 to find out if they owe a penalty and then include the amount for the penalty on their tax return. Form 2210-F calculates the same penalty liability but is specifically for farmers and fishers.
It’s important to remember that even if your employer withholds income taxes from your paycheck, you might still owe income tax if you received any of the following types of income:
- Gains from the sale of assets
- Prizes or awards
You may owe estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
If you’re unsure of whether or not you should complete Form 2210, the beginning of the form features a section entitled “Do You Have to File Form 2210?” By walking through the guide’s questions, you’ll find out whether or not you should complete Form 2210.
Special rules for Form 2210 apply for the following taxpayers:
Farmers and fishers: If at least two-thirds of your gross income for the current year or next year comes from farming or fishing, substitute 66⅔% for 90%. Household employers: When you estimate the tax on next year’s tax return, include your household employment taxes if either of the following applies: You will have federal income tax withheld from wages, pensions, annuities, gambling winnings, or other income. You would be required to make estimated tax payments to avoid a penalty even if you did not include household employment taxes when figuring your estimated tax. Higher-income taxpayers: If your adjusted gross income (AGI) for the current year was higher than $150,000 ($75,000 if your filing status for the current year is married filing separately), substitute 110% for 100%. (This rule does not apply to farmers or fishers.)
How Do I Avoid An Underpayment Penalty for 2020?
If you’ve already missed a payment or paid less than what you owe, you may qualify for a penalty waiver. Circumstances that may qualify you for a penalty waiver include: You owe less than $1,000 You had zero tax liability for 12 months in the previous year You paid 90% of the taxes for the current year or 100% of the taxes of the prior tax year Failure to pay due to a casualty, disaster, or other unusual situation Retiring after age 62 Becoming disabled If any of these apply to you, be sure to request a waiver while completing Form 2210. Even if you made up for a missed payment in a later payment, you would still receive a small penalty for missing the original due date. However, you may be able to reduce or eliminate the fee if you use the Annualized Income Installment Method with Schedule AI at the bottom of Form 2210. Ultimately, the best thing you can do to avoid tax penalties is to be proactive with your estimated taxes. From the start, take advantage of Form 1040-ES to calculate your estimated taxes. By knowing how much you’ll need to pay in taxes, you can create strategies to put aside enough money and a payment plan that will set you up for success. Do you want to be positive that you’re on the right track with your taxes for next year? Working with an expert accountant is the best way to ensure you don’t underpay. They can answer any questions you may have and guide you in the right direction.
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