The federal government requires you to pay income tax throughout the year. A penalty is usually avoided by paycheck withholding or paying four estimated tax payments.
No penalty is assessed when four equal tax installments fall within $1,000 or 90% of your tax liability.
You also avert penalty with four equal tax payments totaling 100% of your tax liability in the preceding year. When your adjusted gross income for the year is greater than $150,000 – or $75,000 if married filing separately – pay 110% instead of 100%.
Estimated tax payments based upon your last tax return prevent the penalty but can create other problems. If your income for 2012 is higher than 2011, you owe more tax in April 2013. If your income is lower in 2012, you pay more than necessary as an interest-free loan to the government.
To resolve this, ask your certified public accountant (CPA) to calculate your 2012 estimated tax payments based upon the “regular installment method.” This computation requires you to provide your CPA with expected income and deductions for the entire year.
If necessary, you can make an estimated tax payment for one period in which you incur unexpected additional income.
Ask your CPA to determine an estimated tax payment based upon the “annualized installment method.” However, if you earn income throughout the year from which tax is not withheld, simply paying four equal payments is much easier. Determination of your tax each quarter is not possible without full-year estimates of income and deductions.