Important Reminder for the New Tax Year
Working as an employee it is easy to forget about paying Uncle Sam. Taxes are withheld from each paycheck before it ever even hits the bank account and not much thought is ever given to it. At least not until the coveted W-2 arrives. A mad dash is made to file taxes on February 1 with hopes of a large refund.
On the other side of the spectrum, there are the independent contractors and small business owners that operate pass-through entities. No monies are withheld and often taxes are not thought about until all the “Tax Day” ads and discounts start popping up on TV and social media or until your accountant leaves countless messages requesting information. The dreaded April 15 is here and it’s time to write that check to the not-so-favorite uncle. However, the large check and additional interest and penalties that may be associated with the underpayment can be avoided by making quarterly tax payments.
Quarterly (or estimated tax) payments are how self-employed individuals pay their taxes to the IRS throughout the year. These four payments, made every three months, cover your Income tax as well as the employee and employer portion of Social Security and Medicare, which is known as self-employment tax. The self-employment tax rate is 15.3 percent of your self-employed income. Your income tax is based on your individual tax rate. It is recommended that you pay in 25-30 percent of your self-employed income each quarter. The due dates for the 2020 tax year are:
First Quarter: April 15, 2020
Second Quarter: June 17, 2020
Third Quarter: September 16, 2020
Fourth Quarter: January 15, 2021
New IRS 401(k) Limits for 2020*
- The elective deferral limit for 401(k), 403(b) and 457(b) plans increases to $19,500 in 2020 ($19,000 in 2019).
- The limitation on catch up contributions for employees age 50 and over increases to $6,500 in 2020 ($6,000 in 2019).
- The maximum “annual addition” limit for a defined contribution plan increases to $57,000 in 2020 ($56,000 in 2019).
- The annual dollar limit on compensation that can be taken into account increases to $285,000 in 2020 ($280,000 in 2019).
- Compensation for determining highly compensated employee (“HCE”) status increases to $130,000 in 2020 ($125,000 in 2019).
*Source: irs.gov/pub/irs- drop/n-19-59.pdf
If you are unsure of how to calculate these payments or if you need additional assistance in figuring your income, it may be a good idea to contact a tax professional in your area.
ABOUT THE AUTHOR: Tonya Merrick is a CPA with C.R. Parr & Associates, P.C.