Annualized Income Installment Method
Candlefocus EditorWhat is Annualized Income Installment Method?
The annualized income installment method is a method used by self-employed taxpayers to pay their quarterly estimated tax payments. This method was designed to reduce the amount of underpayment and to avoid corresponding penalties in the case of uneven payments when a taxpayer’s income fluctuates throughout the year. Under the regular installment method, payments are made in four equal installments. The annualized income installment method, however, allows taxpayers to refigure estimated payments based on income earned in the same year.
The IRS has provided a worksheet and instructions on how to figure estimated taxes using the annualized income installment method. Under this method, taxpayers must add up their year-to-date taxable income and divide it into four payment dates, which are generally on the 15th of April, June and September and January. The taxpayer then divides the fiscal year income into four equal amounts and computes the corresponding payments for each due date. This method allows taxpayers to pay estimated taxes on income earned during each payment period, thus avoiding underpayment and associated penalties.
For taxpayers without access to a calculator or tax software, the IRS provides a manual calculation worksheet for computing the annualized income installment method. This worksheet is available for both estimating taxes for the next quarter and for amendment of previously filed quarterly payments.
The annualized income installment method offers self-employed taxpayers a way to manage estimated tax payments and reduces the risk of underpayment penalties. Taxpayers must, however, use caution when calculating their quarterly estimated payments and must also understand the implications of making payments on income they haven’t yet earned. Ultimately, taxpayers must be responsible in filing and making timely payments in order to ensure accuracy in their federal income tax returns.