My income has been reduced this year

Forum|Forum|1 year ago
August 28, 2024
1 reply
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Do I have to make the estimated payments based on my 2023 tax year if I am making significantly less?

Is there a way/tool to recalculate my estimated tax payments if my income has been reduced?

Can I skip a quarterly payment without a penalty? What it the penalty?

carolineb

Hello @NatashaFH !

You are correct in that you do not need to make the estimated payments that were calculated on your prior year's income if your income has significantly reduced.

You did not specify if your income includes both W2 and 1099 income, but this 2023 Tax Calculator tool should give you an idea of what your tax liability will be for 2024 (not much of a change between 2023 and 2024 tax law): 2023 Tax Calculator

This tool enables you to enter all of your income, both W2 and 1099, to give you an estimate of what you will owe. You can then adjust your quarterly payments to reflect your new tax liability, rather than overpaying on your prior year liability amount.

Better to adjust the quarterly payment amount rather than skipping a payment altogether, as you still may be hit with an underpayment penalty for a particular quarter even if you receive a refund. The penalty calculation is not a simple answer, because after all we are talking about the IRS. Here is a link that helps to explain how penalties are calculated on individual estimated payments: Underpayment of Estimated Tax by Individuals Penalty

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NatashaFHAuthor

Thank you Carolineb for your response. It is very helpful!

I am 1099 contractor. I have already paid 8000 this year. If my new estimated payments are a total of 7500 for the year, what do I pay for Quarter 3 and 4 to avoid penalties?

I appreciate your time, thank you!

carolineb

Hi @NatashaFH ,

Thanks so much for your feedback 🙂

If your new estimates show that your tax liability for the entire year is only $7500, and you have already paid in $8000, no need to make any additional payments for Q3 or Q4. No penalty will apply since your Q1 and Q2 payments were sufficient to cover any tax liability for the year.

If you happen to have a windfall during Q3 or Q4, just be sure to recalculate tax liability and pay accordingly. Otherwise, grab a cup of chamomile tea and snuggle up in a blanket, you are good for the rest of the year!

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