IRA Publication 505 has a worksheet in chapter 2 on how to figure your estimated tax payments when your income is variable throughout the year. It is kind of a PITA but not too bad.
And where did I suggest that you did suggest sending nothing for the first three quarters?
I just expanded on a statement that you made that, read in isolation, did not cover all the situations including the one the OP appears to be in.
We do.
Others still seem to be, such as:
I just want to check to see if I’m understanding this right.
Seth (Self-employed taxpayer hypothetical) earned $100,000 in 2009 and owed taxes of $24,000. He had to make four estimated quarterly payments during 2009 in April, July, October, and January. For each he estimated he had earned $25,000 in the previous quarter and owed $6000, which he paid. He then did his return in April 2010 for his actual earnings and tax debt in 2009 and was on the money.
Now it’s 2010. Seth is expecting to earn less money this year. He guesses he’ll only earn $50,000 and only owe $12,000. So in April, he’s earned $12,500 and he sends his estimated tax of $3000 for the previous quarter. Then he does the same in July and October. Then in December, Seth gets an unexpected contract that earns him an additional $50,000. Seth now realizes his income and taxes for 2010 will be the same as they were in 2009.
So in the fourth quarter of 2010, Seth earned $62,500 and paid taxes of $15,000. He then submits his return in April of 2011. What happens next?
Does the IRS look at his total earnings and tax paid for the year as a whole unit? He earned a total of $100,000 and paid a total of $24,000 during the course of 2010, which are the correct figures. Or does the IRS look at his total annual figures and retroactively divide them up into quarters and assess them that way? If so, they could claim that his total tax debt for the year was $24,000 and therefore he should have been paying $6000 a quarter. But he only paid $3000 in his first three quarterly estimates so he underpaid and owes a penalty.
Which, in broad terms, is correct?
I also recommend reading Pub 505.
I’m self employed and did my own taxes for many years (finally got them done by CPA this year). ISTR that you can have the IRS to consider your tax payments by quarter according to how much you made that quarter, rather than considering the whole year’s earnings divided by quarters, somehow indicating that on your return.
Something else I’ll throw in here: you can pay your taxes more often than quarterly. I’m signed up for EFTPS and pay mine monthly (no fees involved).
In broad terms… it depends on what Seth does when he files his taxes. He should comlpete form 2210 (Underpayment of Estimated Taxes) and complete Schedule AI (Annualized Income Installment Method) which allows him to declare his income, deductions (etc.) by quarter and state the taxes paid on that. That will demonstrate that he has paid taxes correctly. If he does not complete that form, I do not know for sure but I suspect that the IRS will divide by four and assess a penalty (which he could overturn by filing 2210 as described). I was in a similar situation to Seth for 2009 and Turbotax calculated that I owed a penalty, but on doing the installment method stuff, I proved not to.
IANA tax pro or CPA, but I’ve been in all these situations more than once. IMO, **Little Nemo **gave the perfect scenario, and **amarone **gave the perfect answer.
My understanding and experience:
Absent Form 2210 the IRS will *assume *your income was evenly distributed throughout the year. And insist your payments should have been too. And assess penalties and interest accordingly if your payments weren’t.
If you have lumpy income just send in a reasonable percentage each quarter, file Form 2210 with your 1040 package, and sleep easy. That is why the estimated payments are due about a month after each quarter ends; to give you time to figure it out.
Me? I almost always short-pay by 10% or so and owe them the shortfall on Apr 15th. They later send me a bill for the penalty and interest. It’s anywhere from 50 to a couple hundred bucks. Their interest rates are below what I can earn on my capital and you have to be really egregious before they assess a penalty. Calling a penalty a “fine” makes it sound a lot more scary than it is. We’re talking a parking violation here, not Murder One.
Like most things with tax & estimates, close enough good enough works. Relax.
If I’m understanding you correctly, the IRS’ default assumption is that your income was spread out evenly and your quarterly payments should be as well. But you can submit documentation to show that your income was unequal in different quarters in order to justify having made unequal payments.
I am certain that your second sentence is correct. I think that your first is also correct, and maybe a CPA can come along and confirm this or fight my ignorance.
Yes, the penalty on Federal taxes is not much. People might want to check their state, though - Georgia charges much more than the Feds, so I would be more careful about not underpaying my state tax.