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Last year my self-employment income was $300k and I paid about $80k in federal taxes.

This year, in the first quarter, all of my business dried up and I had $0 in income. Turbo tax was advising me to make an estimated tax payment of $20K on Apr 15th, but I had no income from which to pay this amount.

In May I got a huge contract, and business surged, so I will now make a $40K payment by Jun 15th. But as I understand the rules, I will owe a penalty and interest to the IRS as a result.

Question: I understand that the IRS wants their cut of your income on a quarterly basis, but how can I pay them a cut of income I didn't make? And am I correct that I have now broken the rules and will incur penalties?

BrenBarn
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Fixee
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2 Answers2

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You will not necessarily incur a penalty. You can potentially use the Annualized Income Installment method, which allows you to compute the tax due for each quarter based on income actually earned up to that point in the year. See Publication 505, in particular Worksheet 2-9. Form 2210 is also relevant as that is the form you will use when actually calculating whether you owe a penalty after the year is over.

On my reading of Form 2210, if you had literally zero income during the first quarter, you won't be expected to make an estimated tax payment for that quarter (as long as you properly follow the Annualized Income Installment method for future quarters). However, you should go through the calculations yourself to see what the situation is with your actual numbers.

BrenBarn
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Well a definitive answer would require a lot of information. Instead of posting that kind of info online, you should take a look at the instructions for Form 2210 and in particular "Schedule AI -- Annualized Income Installment Method," which corrects the penalty for highly variable income.

Using this form you will likely be able to avoid the penalty, but it is hard to know for sure.

rhaskett
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