Changes to Estimated Tax Payment Requirements

Editor: Stephen E. Aponte, CPA

For 2009 tax years, the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), instituted changes to the rules governing the amount of estimated tax that individual taxpayers with income from small businesses must pay. As 2009 draws to a close, practitioners should make sure their clients are aware of and complying with the new rule.

Individuals in the United States who are employed by others usually have federal income taxes (and state taxes, where applicable) withheld from their paychecks by their employer. The amount of income tax withheld by an employer from an employee’s wages depends on two things: the amount the employee earns and the information the employee gives the employer on Form W-4, Employee’s Withholding Allowance Certificate.

Form W-4 includes three types of information that the employer will use to figure an employee’s withholding:

• Whether to withhold at the single rate or the married rate;
• How many withholding allowances the employee claims (each allowance reduces the amount withheld); and
• Whether the employee wants an additional amount withheld.

Estimated Tax

If taxpayers do not pay their taxes through withholding or do not pay enough in that manner, they may have to make estimated tax payments. People who are self-employed generally will have to pay their taxes this way. Taxpayers may 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. Estimated tax is used to pay not only income tax but also self-employment tax, household employee tax, and the alternative minimum tax.

Who Must Pay Estimated Taxes

Under Sec. 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; Sec. 6654(d)(1)(C)).

Special Rule for 2009

For tax years beginning in 2009, in computing estimated taxes, an individual uses 90% of the tax shown on the individual’s return for the preceding year instead of the 100% required by Sec. 6654(d)(1) (B)(ii) (Sec. 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 (Sec. 6654(d)(1)(D)(ii)(I)); 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 (Sec. 6654(d)(1)(D)(ii)(II)).

A certification under the second point must be in the form and manner, and filed at a time, as the IRS may prescribe by regulations (Sec. 6654(d)(1)(D)(ii) (flush language)). As of this writing, no such regulations have been issued.

A married individual (within the meaning of Sec. 7703) who files a separate return for the tax year for which the amount of the installment is being determined is a qualified individual if the adjusted gross income shown on the return for the preceding tax year is less than $250,000 and that individual meets the certification requirement of Sec. 6654(d)(1)(D)(ii)(II) as discussed above (Sec. 6654(d)(1)(D)(iv)).

For purposes of the definition of a qualified individual, income from a small business means, with respect to any individual, income from a trade or business the average number of employees of which was less than 500 employees for the calendar year ending with or within the preceding tax year of the individual (Sec. 6654(d)(1)(D)(iii)).

Practice tip: The instructions for the 2009 Form 1040-ES, Estimated Tax for Individuals, have not been updated to reflect the changes made by ARRA. Instead, the IRS has inserted a cautionary note warning taxpayers that ARRA changes “might affect your calculation of estimated tax.”

When Estimated Taxes Are Due

Estimated tax payments are due four times per year: April 15, June 15, September 15, and January 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.

EditorNotes

Stephen Aponte is a senior manager at Holtz Rubenstein Reminick LLP, DFK International/USA, in New York, NY.

Unless otherwise noted, contributors are members of or associated with DFK International/USA.

For additional information about these items, contact Mr. Aponte at (212) 792-4813 or saponte@hrrllp.com.