What Form 1040-ES (2020) Is For
Form 1040-ES is the IRS form that taxpayers use to figure and pay estimated taxes on income that does not have taxes withheld. It applies when you earn income from self-employment, investments, small business activities, or other sources that require estimated tax payments. The form helps you assess your taxable income, calculate your total tax, and make quarterly estimated taxes to avoid underpayment penalties.
When You’d Use Form 1040-ES (2020)
You use this form when you expect to owe at least one thousand dollars in income taxes after subtracting taxes withheld and refundable credits. You must pay estimated taxes if withholding and refundable credits will not cover enough tax for the current tax year. You also use the form when income changes during the year, requiring updated estimated payments.
Key Rules or Details for 2020
- Safe harbor thresholds: Taxpayers can avoid penalties by ensuring estimated tax payments cover ninety percent of the current tax or one hundred percent of the prior year’s total tax. These rules protect taxpayers when earnings fluctuate.
- High-income safe harbor: Individuals with an adjusted gross income above $150,000 must meet a higher safe harbor of 110% of the prior tax year's covered income. This ensures that taxpayers with higher earnings pay their fair share of tax throughout the year.
- Quarterly schedule: Quarterly estimated taxes are due in April, June, September, and January, and each quarterly payment must match the required amounts. Taxpayers must review owing dates to avoid penalties.
- Full tax coverage: Estimated payments must include income taxes, self-employment tax, payroll taxes, and other taxes such as capital gains tax. These requirements make sure all tax liability is accounted for.
- Unequal income: Taxpayers with unequal payments or irregular earnings can use special rules to estimate their tax liability. These rules help independent contractors and small business owners remain compliant.
- Withholding alternative: Taxpayers may increase the tax withheld from wages instead of making estimated payments. This is allowed when withholding is adjusted early enough to cover the expected tax.
- Stimulus year adjustments: The 2020 tax year includes special rules relating to refundable credits and unusual circumstance adjustments. These rules help taxpayers manage payments during a year with unusual economic conditions.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Determine if you need to pay estimated tax
Review expected income, taxes withheld, and refundable credits to determine whether your estimated tax bill will exceed one thousand dollars. Compare the liability from the prior year and the current tax year to determine if estimated payments are required.
Step 2: Gather your financial information
Compile prior returns, expected earnings, deductions, and other taxes that apply. This information allows you to calculate taxable income and accurately estimate how much tax you owe for the year.
Step 3: Complete the worksheet
Use the worksheet in the form instructions to calculate adjusted gross income, deductions, total tax, and estimated tax liability. Include self-employment tax, payroll taxes, and other taxes applicable to your earnings.
Step 4: Identify required estimated payments
Compare your estimated tax with safe harbor amounts and subtract withholding and refundable credits. This figure determines how much you must pay quarterly to avoid underpayment penalties.
Step 5: Divide estimated payments into quarterly payments
Split your required amount into four quarterly estimated taxes using the IRS quarterly schedule. Use the voucher system if you choose to mail each payment for the next quarter.
Step 6: Submit the payment
Pay using IRS Direct Pay, card payment, EFTPS, or mailed checks with vouchers. Confirm each estimated tax payment so it is recorded correctly and applied to the current tax year.
Step 7: Maintain proper records
Record every payment, confirmation, and voucher that you file. These records help reconcile estimated payments with your annual return when you complete Form 1040 or Form 1040-SR.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Incorrect income estimates: Taxpayers often misjudge earnings, but you can avoid this by reviewing actual income quarterly and adjusting estimated payments to reflect updated figures. This ensures enough tax is paid.
- Forgetting self-employment tax: Self-employed taxpayers sometimes overlook self-employment tax, yet you can avoid penalties by adding this tax to estimated payments. This ensures full coverage of payroll taxes.
- Missing due dates: Some taxpayers forget quarterly dates, but you can avoid penalties by marking each due date and submitting every quarterly payment promptly. This prevents underpayment issues.
- Using incorrect safe harbor: Taxpayers sometimes use the wrong prior year amount, but you can avoid mistakes by checking the correct safe harbor percentage before calculating estimated payments. This avoids unnecessary penalties.
- Ignoring withholding options: Some individuals forget they may increase tax withheld, but you can prevent problems by adjusting withholding early. This reduces the need for separate estimated payments.
- Improper payment identification: Some payments lack required details, but you can avoid delays by listing your Social Security number and form name on every payment. This ensures payments are credited correctly.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
Form 1040-ES is not filed with the IRS; however, each payment is applied to your account when it is paid. When you complete your annual return, estimated payments are subtracted from your total tax to calculate whether you owe or receive a refund. If you underpay estimated costs, the IRS may assess an estimated tax penalty unless you qualify for reasonable cause or other unusual circumstance relief.
FAQs
How does Form 1040-ES 2020 determine whether estimated tax payments are required?
You must make estimated tax payments if withholding and refundable credits do not cover enough tax for the current tax year and you expect to owe at least $1,000.
How do I calculate an estimated tax payment for independent contractors using estimated tax rules?
You calculate estimated taxes by estimating taxable income, adding other taxes, including self-employment tax, subtracting withholding, and dividing the remainder into four equal quarterly payments.
What causes an estimated tax penalty when filing Form 1040-ES?
An estimated tax penalty applies when estimated payments or withholding are insufficient to meet the safe harbor requirements. The penalty applies even if you pay the full tax with the annual return.
How do estimated payments work when filing Form 1040 and income tax returns?
Estimated payments reduce your tax bill when you file Form 1040. Any amount paid reduces what you owe and may generate a refund if you overpay.
Can I use Form 1040-ES to handle my federal tax obligations for the next quarter?
Each quarterly payment covers income earned during the period, and Form 1040-ES allows payments for the next quarter using vouchers or electronic payment.
Are due dates for IRS form payments flexible under unusual circumstance rules?
The IRS may provide relief for unusual circumstances, but taxpayers must meet reasonable cause standards. Otherwise, due dates remain fixed.
