Quarterly Estimated Taxes Dividing by four: when it works and when it doesn't

A made-up example

Picture a small shop having its best year ever. The owner guesses what the tax will be, divides that guess by four and sends the same amount on all four dates. The shop is made up, and so are the numbers.

Say the owner guessed the tax at $16,000 and sent $4,000 each time. Last year's total tax was $22,000, and income was under $150,000. The year ends better than the guess, and the real tax comes to $30,000.

The payments added up to $16,000. That's short of both safe harbors: 90 percent of this year's tax ($27,000) and 100 percent of last year's ($22,000). So a penalty is likely for each of the four dates.

If the owner had divided last year's $22,000 by four instead, each payment would have been $5,500. That meets the safe harbor no matter how the year turns out. The rest of the tax would still be due in April, but without a penalty.

What we do instead

We start from a number the safe harbor counts. Usually that's last year's total tax, or 110 percent of it if last year's adjusted gross income was over $150,000. If this year is clearly lower, we use 90 percent of this year's tax, figured from your up-to-date books. A forecast of the year is great for planning, and we'll talk it through with you. The payment itself comes from one of those safe harbor numbers.

If your income is uneven, the annualized income method can let your payments follow what you've actually earned. You file Schedule AI with Form 2210 to use it.

Withholding changes things for an owner who also gets a paycheck. Tax taken out of wages counts, and the IRS treats it as paid evenly through the year. The made-up shop had no paycheck, so its four payments had to cover everything. If you get wages, your numbers will look different.

If you've already sent four equal payments, bring the dates and amounts. We'll compare them with last year's total tax and with your books. If there's a gap, we'll show you the catch-up payment that closes it soonest, since every day it's paid sooner keeps any penalty smaller.

A better way to set each payment

Start with three facts: which date is next, whether last year's return is filed and whether your books are caught up. Those three facts tell us which safe harbor fits, and then the amount follows. The June page covers the two-month period, and the page on equal payments covers all four periods.

Questions owners ask about equal payments

I already sent four equal payments. Do I have to undo them? No. Bring the dates and amounts. We'll compare them with last year's total tax and your books. You may owe a catch-up payment on the next date, or you may already be covered.

Is the safe harbor the same as dividing by four? It can look the same. Paying last year's tax (or 110 percent of it at higher incomes) in four parts gives you equal payments. The difference is where the number comes from: last year's filed return instead of a guess.

Can I catch up with one bigger payment later? Yes. The penalty is figured by the number of days each payment was short, so catching up sooner keeps it smaller.

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