It's my understanding the IRS assumes taxes will be paid in four equal installments. A cash-basis commission based 1099 salesperson, or consultant might have huge fluctuations in income. Can they avoid an underpayment penalty if they pay estimated taxes based on actual quartery income/revenue? Or, will they be assessed a penalty because the full amount wasn't paid in equal installments?
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Estimated taxes
When you file the tax return, use Form 2210 to allocate income and tax payments to the specific quarter in which they were earned/paid in order to avoid or decrease the penalty. -
How much is the penalty without annualizing his income and deductions?Comment
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2006 estimate
Sorry, I should have been more clear. The estimated taxes are for 2006, and the income of the client will probably be 1/3 of the previous year's income. As such, paying last year's tax or 90% would be paying far too much.Comment
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Then you'll need to prepare a tax projection on a quarter by quarter basis if your client doesn't want to safe-harbor for 2006. You can calculate this by hand (a pain), or there are some very good tax projection programs on the market (BNA, etc.), and some tax software packages have 2006 projection modules built into them.Comment
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