Just a quick reminder: If you pay quarterly estimated taxes, your first 2007 payment also is due April 17. (Ignore the date on the voucher insert below; it was printed before the IRS discovered that this year we all get an extra day to get our taxes done, both the annual filings and estimated payments.)
The IRS would prefer you figure the total amount of estimated taxes you’ll need to pay to ensure you don’t face any underpayment issues and then divide it by four and send in four equal payments. You can find the instruction booklet, worksheet and payment vouchers here.
However, if your income fluctuates from quarter to quarter, you can use the annualized method. With this method, you figure each 1040ES payment period separately and pay the appropriate tax for each.
The beauty of the annualized approach is if your job is one where you earn most of your income in one period, say you have a pool service and the summer months are your big business times, you want to pay the taxes on that income when you have the cash.
The downside of this method is that it is more complicated. You have to complete a worksheet, found in IRS Publication 505, Tax Withholding and Estimated Tax. If you’re a sole proprietor, you’ll also have to fill out another worksheet in Pub. 505 to figure your annualized self-employment taxes that are included with estimated payments.
Then when you file your annual 1040, you’ll have to complete Form 2210 to explain why you simply didn’t send in four equal payments. It also will help protect you against potential underpayment penalties and interest.
Sure the annualized method is a bit more complicated, but it does help with cash flow — you actually have the money to pay the taxes due!
