What Does the March 1 Deadline Mean for Farmers?
With tax software missing key updates and some important questions remaining unanswered, some farmers who did not pay estimated tax by January 15 may not be in a position to file their returns by March 1. Although missing the March 1 deadline may subject these farmers to an underpayment of estimated tax penalty, April 15 remains the filing deadline for most individual taxpayers, including farmers. This post reviews the special estimated tax rules for farmers and the significance of the March 1 deadline.
Generally, self-employed taxpayers are required to make quarterly estimated tax payments or pay a penalty. IRC § 6654(e)(1). Exempt from this requirement are those whose estimated tax liability for a particular tax year does not exceed $1,000 or whose income tax liability for the prior year was zero. There is also an exception for the newly retired or disabled if they fail to make estimated payments for reasonable cause. In addition to these exceptions, a special rule applies to the payment of estimated tax by individuals who are “farmers or fishermen.” This special rule protects qualifying farmers whose income varies throughout the year from the burden of making quarterly payments. IRC § 6654(i).
Qualifying Farmer Determination
Taxpayers are “qualifying farmers” for purposes of this special rule if:
- the individual’s “gross income from farming” is at least 66⅔ percent of their “total gross income” from all sources for the taxable year or
- the individual’s gross income from farming shown on the return for the preceding taxable year was at least 66⅔ percent of their total gross income from all sources.
The following figures illustrate the calculation for determining whether a farmer is a qualifying farmer for purposes of the estimated tax exception for farmers.
(Source: Internal Revenue Manual Exhibit 20.1.3-4).
(Source: Internal Revenue Manual Exhibit 20.1.3-4).
Note: During periods where farm income may be reduced, some clients who have historically qualified as “qualifying farmers” may no longer qualify for the special estimated tax rule. The restriction of like-kind exchange deferral of tax treatment to real property may also impact qualification since income derived from the sale of depreciated property is not “farm income” for purposes of this provision. Because the two-thirds rule, however, applies to the current taxable year or the preceding taxable year, retiring farmers or those hit by one year of decreased farm income will not suddenly lose their farmer status.
Special Rule for Qualifying Farmers
If meeting the gross income test, farmers are exempt from a penalty for failing to file estimated taxes if they:
- File their return and pay all tax due by March 1, 2021, OR
- Their income tax withholding will be at least 66 2/3% of the total tax shown on their current year tax return or 100% of the total tax shown on their prior year return.
Alternatively, farmers may choose to make only one estimated tax payment by January 15, 2021, Those who choose this option may file the return and pay the remainder of the tax due on the standard tax filing deadline, which is April 15, 2021. Qualifying farmers making one estimated tax payment by January 15, 2020, must pay the smaller of:
- 66 ⅔% of 2020 tax, or
- 100% of the tax shown on the 2019 return
For joint returns, the spouse's income must be considered in determining if the taxpayer meets the two-thirds of gross income from farming requirement.
Fiscal year farmers
Fiscal year farmers can either (1) pay all of their estimated tax by the 15th day after the end of their tax year or (2) file their return and pay all tax owed by the 1st day of the 3rd month after the end of their tax year.
Penalty for Failure to Pay Estimated Tax
Qualifying farmers who did not pay required estimated tax for 2020 by January 15, 2021, or file their 2020 return and pay any tax due by March 1, 2021, may owe an underpayment of estimated tax penalty Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, must be filed to determine the amount owed.
IRC § 6654(a) establishes that the penalty for underpayment of estimated tax equals the amount of the underpayment for the period of underpayment multiplied by the applicable underpayment rate, which is three percentage points above the federal short-term interest rate. IRC § 6621(a)(2). IRS determines this rate every quarter, but the rate that applies to a calendar-year qualifying farmer’s underpayment is the rate for the first quarter of the year following the tax year under which the tax liability arose. Because the federal short term interest rate for quarter one of 2021 was zero, the penalty rate for the first quarter of 2021 is three percent.
Lonnie is a qualified farmer who did not pay estimated taxes for 2020. He also missed the March 1 deadline to file his return and pay his taxes to avoid the underpayment penalty. He is not eligible for a waiver. For 2020, Lonnie had $21,000 of overall tax liability. His estimated tax liability was 66 2/3 percent of that amount or $14,000. He files his return and pays the tax due on April 15, 2021. Because the underpayment rate for January 2021 is three percent, Lonnie will owe a three percent underpayment penalty for the proportion of the year for which his payment was delinquent, calculated as follows:
$14,000 (estimated tax liability) x 90/365 (days delinquent / days in the year) x .03 (underpayment rate) = $104.
Deferred Payment and FFCRA Considerations
In 2020, the CARES Act allowed self-employed individuals making estimated tax payments to defer the payment of 50% of the social security tax on net earnings from self-employment for the period running from March 27, 2020, through December 31, 2020. This amount is not used to calculate the estimated tax due. The delayed taxes must be repaid in two equal installments, one due by December 31, 2021, and the other due by December 31, 2022 Additionally, the Families First Coronavirus Relief Act provided sick leave and family leave credits to eligible self-employment individuals that could reduce a farmer’s overall tax liability and underpayment penalty amount.
Waiver of Underpayment Penalty for Disaster
Farmers and fishermen may be eligible for a waiver of all or part of the estimated tax penalty by reason of casualty, disaster, or other unusual circumstances where the imposition of such addition to tax would be “against equity and good conscience.” IRC § 6654(e)(3). Certain estimated tax payment deadlines for taxpayers who reside or have a business in a federally declared disaster area are postponed for a period during and after the disaster. During the processing of these tax returns, the IRS automatically identifies taxpayers located in a covered disaster area (by county or parish) and applies the appropriate penalty relief. Form 2210-F instructions say that farmers in these areas should not file Form 2210-F if the underpayment was due to a federally declared disaster. If a penalty is owed after the automatic waiver is applied, the IRS will send a bill.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.