The U.S. federal tax system is a pay-as-you-go arrangement. Taxpayers are supposed to pay the IRS relatively soon after they receive any income.
Ideally, you pay toward your tax obligation throughout 2020 by one means or another. This is usually done by making estimated quarterly payments or having an employer withhold taxes from your paycheck.
But this can be challenging, especially for the self-employed. If you were unemployed or had irregular income due to the pandemic, it can be even harder.
Worried about how to pay your taxes when it’s time to file your 2020 return? Perhaps this bumpy year caused you to forget to make an estimated payment. Maybe you were living from one unemployment check to the next.
Whatever the case, you have options. Learn what to do next.
Adjust Your Withholding
Taxpayers who worked as employees throughout the pandemic might fare better than others when it comes time to file their tax return in May 2021. The IRS extended the filing deadline for 2020 taxes in response to the ongoing pandemic, from April 15 to May 17, 2021.
If you were an employee, you've already paid as you earned, because taxes have been withheld from each of your paychecks. This was done based on the information you provided on your W-4 Forms.
Based on these forms, your employer has been forwarding that money to the IRS on your behalf throughout the year.
Your withholding should come pretty close to covering what you owe if you completed your Form W-4 correctly and didn’t have any additional sources of income that you haven’t accounted for.
Form W-4 can be changed as needed. The IRS recommends reviewing and updating it from time to time to ensure that the information you initially provided to your employer is still correct. This includes:
- Your filing status
- The number of your dependents
- Tax credits you’re likely to claim
- Tax credits you won’t be able to claim again this year
Did you pick up a side gig to make extra cash during a difficult year? You can request that more money be withheld from your pay to cover this income. There’s a special line on the 2020 Form W-4 for this purpose.
You should also update your withholding if you had a big life change in 2020. This could be the case if you:
- Had a child
- Had a child “age out” of dependent status at any time in 2020
The IRS provides a handy tax withholding estimator on its website to help you get your withholding just right.
Make Estimated Quarterly Payments
Are you self-employed, or do you prefer to leave your employer out of the process rather than request extra withholding? You can make estimated quarterly income tax payments. These payments should be based on what you will probably owe on all taxable income at year’s end.
IRS Form 1040-ES includes a worksheet to help you make an accurate prediction of what you’re likely to owe.
If you're a sole proprietor or independent contractor, you must make estimated payments. Your clients and customers don’t typically withhold taxes from their payments to you.
The IRS charges penalties if you don’t do so and come up short at filing time. But other taxpayers are free to pay in this way as well.
To avoid an estimated tax penalty, pay at least 90% of your total tax bill by year’s end if you suspect that you’ll owe $1,000 or more in income tax for the year.
The “quarterly” part of this option derives from the fact that estimated payments are due to the IRS four times a year. January 15, 2021, was the final quarterly payment date for the 2020 tax year.
In future years, “If you know your tax bracket, you can send a quarterly payment on September 15 for the third quarter, and January 15 for the fourth quarter,” according to Michael Merlino, president and CEO of Atlantic Accounting Services in Northfield, N.J.
The other quarterly payments are typically due on April 15 and June 15. In 2020, these dates were pushed back to July 15 in response to the coronavirus pandemic.
In 2021, the first three deadlines were back to normal: April 15, June 15, and September 15. The April 15 deadline was pushed back to May 17, 2021, for estimated tax payments.
Residents of Texas and surrounding states had their regular April 15 tax deadline extended through June 15, 2021, due to February's severe winter storms.
Did You Collect Unemployment?
Of course, nothing has been simple in tax year 2020. Many Americans were out of work during the coronavirus pandemic—9.7 million as of April 2021.
They received a $600-per-week increase in their unemployment checks under the terms of the Coronavirus Aid, Relief, and Economic Security (CARES) Act through July 31, 2020.
This evolved into a $300 increase. The American Rescue Plan Act (ARPA) signed in March 2021 extended the $300 through September 6, 2021.
Taxpayers who would not normally be eligible to collect unemployment, such as sole proprietors and independent contractors, could collect during this same period as well if they lost their jobs due to the pandemic. These unemployment checks were considered to be taxable income.
Then the American Rescue Plan Act (ARPA) was signed into law in March 2021. The Act allows for up to $10,200 of unemployment compensation in 2020 to be tax-free for anyone earning up to $150,000.
The IRS indicates that you should not file an amended tax return if you filed your 2020 return before the ARPA was passed. It will recalculate all returns reporting unemployment income and will issue any resulting refunds by the summer of 2021.
You should have received a Form 1099-G detailing how much you received in unemployment benefits. It should also show how much you had withheld for taxes, if you were able to arrange for withholding.
Unfortunately, most taxpayers got the form after the close of the 2020 tax year. That doesn’t leave you a lot of time to catch up if you’re short on tax payments and weren't affected by the ARPA. You had until January 15, 2021, to make estimated tax payments to cover as much of this income as possible without incurring a penalty.
The IRS offers an interactive tool on its website to help you determine whether your unemployment benefits are taxable. They typically are except for the special provisions of the ARPA.
Did You Get a Stimulus Check?
The federal government provided stimulus checks to help many Americans during the 2020 coronavirus economic crisis. This is not taxable income.
Officially called the “Economic Impact Payment” (EIP), you might even have a little more coming to you. This could happen if the check you received was less than you qualified for because you didn’t receive payment for one or more of your children or for other reasons.
The EIP is technically an advance on a refundable tax credit for the 2020 tax year. The IRS distributed the checks rather than make you wait until you file your 2020 tax return in the 2021 filing season to claim the money.
You can claim any extra that you think you might be entitled to as the Recovery Rebate Credit on your 2020 return. You should do this if, for example, you didn't get an extra $500 for a dependent child.
Information and instructions for this procedure are available on IRS Notice 1444.
The Bottom Line
Due to the pandemic, 2020 was an unusual year that might have affected the amount of your income and how you earned that money. It’s important to make sure as soon as possible that you've paid the correct amount of tax on all your income.
This should include any unemployment payments received that haven't been exempted from taxation by the ARPA.