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My 2021 withholding has already paid 100% of my 2020 tax liability. Can I skip paying estimated taxes on self-employment income for the rest of 2021?

Personal Finance & Money Asked by form2210 on June 16, 2021

My unique situation is as follows:

  • My 2020 AGI was around $20k. My 2020 total tax (Form 1040 line 24) was only $700.
  • My 2021 income will be much higher. I had a W-2 job from January through April of 2021. As of this date (early April), my paystub indicates total federal taxes withheld year-to-date are in excess of $4,000.
  • For the rest of 2021, I will have significant self-employment income.
  • Quick math suggests my total AGI for 2021 will be on the order of $100k, +/-$20k.

In summary, my taxes withheld to date are far in excess of my 2020 tax liability, but will likely be much lower than my 2021 tax liability.

I understand that I need to think about estimated tax payments due to significant self-employment income, to avoid an underpayment penalty. I understand these two statements to mean that I do not need to make estimated tax payments for 2021:

Form 1040-ES page 3:

Payment Due Dates

You can pay all of your estimated tax by April 15, 2021, or in four equal amounts by the dates shown below.

And https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes:

Penalty for Underpayment of Estimated Tax

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

It is true that I have paid, through withholding, at least 100% of my 2020 tax liability before April 15, 2021. This is fairly clear in my head, but I want to ask if anyone knows of a reason this statement is not true:

Since I have had more than enough tax withheld before April 15, 2021, to cover my 2020 tax liability, I do not need to explicitly file or pay estimated income tax on my self-employment income for the rest of 2021 – even though it means I will owe significant tax on tax day next year.

One Answer

Yes, absolutely you can skip estimated tax payments for 2021. Of course, you could end up owing a lot when you file in early 2022, especially if you're earning self-employment income, so make sure you save plenty to be able to pay what you owe then.

Correct answer by Craig W on June 16, 2021

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