This is the time of year our firm is updating tax projections for our CRE broker clients to confirm or adjust the amount of the estimated tax payment they need to pay by June 15. With COVID-19, the payment date has been delayed to July 15.
With this unusual year, what may make estimating this payment more challenging for CRE brokers is a lower income year, erratic cash flow and the fact that three payments are due July 15: 2019’s tax balance and 2020’s first and second quarterly estimated tax payments. Underpaying or making late payments will result in penalties and interest, which will begin accruing on July 15. If your typical payments are too much to make right now, an alternative approach to paying taxes could be helpful this year.
A safe bet is to pay into your safe harbor amount, which is based on last year’s tax liability. Generally, for brokers earning more than $150,000, they will need to pay in 110% of last year’s liability to avoid penalties and interest. For example, if your tax liability last year was $50,000, then your safe harbor amount this year is $55,000. If your income was less than $150,000 last year, then your safe harbor amount is equal to 100% of last year’s tax liability. If you expect your income to be lower than last year, then your safe harbor amount is 90% of this year’s taxes.
Income taxes are supposed to be paid in as the income was earned, thus your quarterly amount can vary based on the amount of income earned during the quarter. We often see brokers go months without a deal closing and not have the income during the quarter to justify a tax payment. When this happens, it might be appropriate to skip a payment or dramatically lower it.
Alternatively, tax withholding done through salary and wages is deemed to have been paid equally throughout the year. If your business is an S-corp and you have established a salary, you may be running payroll monthly or less frequently. In this case, it may be advisable to pause your salary, reevaluate it later in the year and send in a larger than normal income tax withholding with your final payroll of the year. Doing this can relieve you from making estimated tax payments now and allow you to catch up later in the year, without being subject to underpayment penalties and interest.
Each broker’s situation is different but operating as an S-corp can allow more flexibility with many decisions throughout the year, including tax withholding. Our CRE broker clients look to us to evaluate their options throughout the year and make changes accordingly. Feel free to contact us for help evaluating the right course of action for you this year.
