By Evan Benevento
Did you know that farmers have different and more generous estimated tax requirements than most other taxpayers? A typical taxpayer may be required to pay estimated taxes on a quarterly basis, in four equal installments throughout the year on April 15th, June 15th, September 15th, and January 15th of the following year. For qualified farmers, income can be highly seasonal and unpredictable leading to irregular quarterly tax payments under the traditional rules. If you are a qualified farmer, you may be eligible to take advantage of more favorable estimated tax rules such as delaying quarterly payments.
A qualified farmer is an individual in the current year that has at least two-thirds of his or her gross income from farming in both the current AND prior year. For example, a qualified farmer for 2020 will have 66% of his or her gross income from farming in both 2019 and 2020. If this is the first year with a qualified farming activity, then the taxpayer does not need to include the prior year.
All taxpayers can avoid penalties for underpayment of estimated tax by abiding by one of the two “safe harbors” for estimated tax payments. The first is the “prior year safe harbor” method where you are not penalized so long as you pay 100% of your prior-year tax liability (110% if AGI is over $150k) in quarterly estimated tax installments throughout the year. The second method is the “current year safe harbor” which applies so as long as you pay in at least 90% of your actual tax liability for the current year.
For a traditional business owner with steady/predictable income, making quarterly estimates at either of the two safe harbor amounts is relatively straightforward. However, qualified farmers can choose to pay no estimated taxes throughout the year as long as they file their complete income tax return and pay all tax due by March 1st of the following year. Alternatively, if the taxpayer knows that he or she won’t be able to file and pay by March 1st, they can make one estimated tax payment by January 15th of the following year which is also known as the “required annual payment”. This payment is the smaller of 66% (2/3) of your total current year tax, or 100% of the total tax listed on your prior year return. Under either method available to farmers, the result is deferral of most estimated taxes due for the entire calendar year and into the following year.
Farmers typically have unpredictable and seasonal income that make paying traditional quarterly estimated taxes a cash-flow burden that can be difficult to calculate. By utilizing one of the alternatives covered in this article, a qualified farmer is able to preserve cash flow in lean periods and reduce the risk of underpayment penalties.
Please reach out if you have more questions or would like more information on the estimated tax rules for qualified farmers. We’re here to help! Please call 831-726-8500 or email@wheelercpa.com.