A big tax deadline is just a week away. Here’s what you need to know to avoid underpayment penalties

Personal Finance

Whether you have a side hustle or you’re running your own business, you’re a week away from a major tax deadline.

Individuals who pay their estimated taxes every quarter — including independent contractors and members of partnerships — are expected to make their fourth and final payment for 2019 on Jan. 15.

The quarterly deadlines for the 2020 tax year are April 15, June 15, Sept. 15 and Jan. 15, 2021.

While employees have taxes withheld from their pay by their employer, people who run their own businesses are responsible for paying self-employment taxes and income taxes four times a year.

This means entrepreneurs must crunch the numbers and see how their income and expenses will measure up, as well as figure out what they’ll owe Uncle Sam.

“The fourth-quarter estimate is one of the more important quarterly estimates,” said Thomas Neuhoff, CPA and senior associate with Henry & Peters in Tyler, Texas. “You have more information on the full calendar year at this point, compared to a second- or third-quarter estimate.”

Avoiding a penalty

John Ewing | Portland Press Herald | Getty Images

To avoid an underpayment penalty from the IRS, you must pay at least 90% of the taxes owed for a given year — or 100% of the liability from the prior year.

If your adjusted gross income on the prior year’s return exceeded $150,000, you’re responsible for 110% of the tax liability.

Failure to pay the appropriate estimated tax can result in underpayment penalties.

Late-year surprises can leave taxpayers with more or less income than expected for the fourth quarter of 2019.

“Sometimes we have independent contractors or people who work in real estate and work on commission, and they get a big year-end bonus or close a big deal close to year-end,” said Neuhoff.

Similarly, large capital gains from a mutual fund you hold in a taxable account can affect estimates, too. Those funds typically distribute capital gains by selling underlying investments during the fourth quarter.

Your fourth-quarter estimate should consider this tax liability.

Don’t expect a lighter touch

The Internal Revenue Services offices in Washington, D.C.

Adam Jeffery | CNBC

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