Paying Estimated Taxes - Special Rule for 2009

As 2009 winds down many taxpayers and their accountants are attempting to project their 2009 tax liabilities and calculating whether sufficient amounts of tax has been paid  to the Internal Revenue Service throughout the year.

Section 6654 of the Internal Revenue Code requires that a taxpayer make payments of tax in the form of payroll withholdings or quarterly payments when he projects his tax liability to be $1,000 or more.  The taxpayer could be subject to underpayment of estimated tax penalties if he has not timely paid in the lesser of (1) 90% of the tax that he expects to owe or (2) 100% of the tax liability shown on his prior year return (110% if his prior year adjusted gross income was greater than $150,000). 

While payroll withholding may be remitted up until the last day of the year, estimated tax payments are due on a quarterly basis.  Self-employed individuals, as well as those with a significant level of investment or rental income, typically must pay estimated taxes.  Estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.

A special rule for 2009 was put into effect by the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA).  It allows the taxpayer to pay 90% of his prior year tax liability rather than the 100% that is typically required.  This assumes that paying based on the prior year tax is more cost effective than paying based on the projected current year tax liability. 

Individuals are eligible to use this approach to paying estimates when:

• Adjusted gross income shown on his or her tax return for the preceding tax year is less than $500,000 ($250,000 if married filing separately) and
• 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)).

Income from a small business is defined as income from a trade or business in which the average number of employees was less than 500 employees for the calendar year ending with or within the individual's prior tax year.

There are exceptions to the rules noted above that can be very complex. 

Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.

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