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#1343
Kaye Thomas
Moderator

There are two ways to handle the timing issue for estimated tax payments. One is to make four equal quarterly payments that add up to enough to cover your requirement. This is acceptable even if the income boost came early in the year. For example, you get enough added income so you need $12,000 in estimated payments. You’re okay putting in $3,000 per quarter even if all the added income arrived in January.

The other way is to match up with the quarters in which the income arrived. If the need for more estimates arose because of income arriving in the second quarter, you won’t incur a penalty for failing to anticipate this income with a first quarter estimated tax payment, provided that your payment for the second quarter is large enough.

Possibly you’re in a situation where neither alternative seems to be available, because you didn’t pay an estimate in the first quarter, and you didn’t make a big enough payment in the second quarter to avoid a penalty under the alternate calculation. A possible workaround, if available in your situation, is to increase the amount of withholding taken from your paycheck. You can do this in a fixed dollar amount if that’s most convenient. In essence you’re paying estimates through additional withholding. The magic lies in a rule that says any tax you pay through withholding is treated as if paid equally throughout the year, even if you made a sharp increase in the amount of withholding late in the year.

Finally, unless the dollar amounts are huge, you don’t have to do back flips to avoid this penalty. The amount of the penalty is computed as if you owed interest on the amount by which your payments fell short of whatever was needed to avoid the penalty, and the interest rate, while not as low as it was before rates started going up a while back, is still pretty low. It’s desirable to avoid the penalty, but incurring it usually isn’t terribly painful, and carries no stigma.