<title>Learn about the annualized income installment method</title>
<category>biz</category>
<klink type="cncpt">Tell me about the annualized income installment method</klink>
</index>
<content>
<p>If you do not receive your income evenly throughout the year, you may be subject to a penalty for underpayment of estimated tax if you use the regular method for calculating your required estimated payments. For instance, assume you earn a large percentage of your annual income during the last quarter of the year, and you make your estimated tax payments for each quarter based on the income you earned for that quarter. Using the regular method, you may be penalized for underpaying your estimated tax payments for the first three quarters.</p>
<p>If you use the annualized income installment method, however, your required estimated tax payment for each quarter is the amount of tax you would owe for the quarter if you continued to earn income all year at the rate you have thus far.</p>
<p>For example, assume you have a business, and your income fluctuates seasonally. If your total income for the first quarter of the year is $10,000, your required first estimated tax payment is based on the assumption that you expect to earn $40,000 (4 X $10,000) for the entire year. Your minimum required payment is 22.5 percent of the tax you estimate you would pay on $40,000. If you earn $25,000 in the second quarter, your required second estimated tax payment is based on the assumption that you expect to earn $84,000 (2.4 X $35,000, your income so far). Note that the second quarter is considered by the IRS to be two months for this purpose, so the factor is 2.4. Your minimum second quarter payment is 45 percent of the tax you estimate you would pay on $84,000, less the payment you already made for the first quarter.</p>
<p>You are not penalized for having made a smaller payment in the first quarter, because you show that you made adequate payments based on your annualized income. You make an estimated tax payment each quarter based on your income so far, rather than your actual income for the entire year divided by four.</p>
