The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: El_Viajero on May 29, 2019, 10:31:15 AM
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I'm self-employed and pay income tax each quarter. Will I face a penalty if I underpay during one quarter but make up the difference the following quarter? I'll still have paid everything I owe by the end of the tax year.
Just to be clear, I typically pay (.25 * total) each quarter. So I'd be paying, say... (.15 * total) during one quarter and then (.35 * total) the following quarter.
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If your income is seasonal or not even throughout the year, you can do the Schedule AI Annualized Income Installment Method, which would potentially reduce any underpayment penalty you would have had, given the shorter version assumes your income is earned evenly throughout the year.
Ctrl + F to find - Schedule AI Annualized Income Installment Method
https://www.irs.gov/pub/irs-pdf/i2210.pdf
Edit:
Also, the quarters are not 25% each. The quarters and amount as a fraction of the total you should pay in is as follows: 1st quarter is 3/12, 2nd is 5/12, 3rd is 8/12 and 4th is 12/12.
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If you don't have any withholding, and thus use only estimated tax payments, you may be hit with an underpayment penalty for the underpaid quarter.
If you overpay in a previous quarter, then you can get away with underpaying in a subsequent quarter, as long the YTD payments always keep up with the YTD tax due.
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Thank you for the guidance! I'll probably end up using the Schedule AI since my income is erratic from month to month.