how estimated tax payments work
taxpayers who have jobs pay an estimate of their annual taxes through employer tax withholdings business owners make estimated tax payments each quarter there are many other sources of income that are not subject to tax withholding income from self employment interest and dividend income and capital gains income are not subject to tax withholdings nor are alimony and some other sources of income that may be reported to a taxpayer on form 1099 1to avoid a penalty for tax underpayment the total tax withholdings and estimated tax payments must equal the lesser of 90 of the tax owed for the current year or the full tax owed in the previous year 2examples of annualized income that fluctuatescomputing estimated tax payments is difficult if the taxpayer s income fluctuates during the year many self employed people generate income that varies greatly from one month to the next assume for example that a self employed salesperson earns 25 000 during the first quarter and 50 000 in the second quarter of the year the higher income in the second quarter indicates a higher total level of income for the year and the first quarter s estimated tax payment is based on a lower level of income as a result the salesperson may be assessed an underpayment penalty for the first quarter avoid underpayment penaltiesto avoid underpayment penalties due to fluctuating income irs form 2210 allows the taxpayer to annualize income for a particular quarter and compute the estimated tax payments based on that amount schedule ai of form 2210 provides a column for each quarterly period and the taxpayer annualizes the income for that period and computes an estimated tax payment based on that estimate 3using the salesperson example form 2210 allows the taxpayer to annualize the 25 000 first quarter income separately from the 50 000 second quarter income 