I like to focus on this part:
"100% of the tax shown on your prior year’s tax return. “
This is in here because you can't predict the future, and you have no way of knowing what your income will be the rest of the year, and certainly no way of figuring out your tax liability, credits, and deductions. This little phrase solves that problem.
It says that if you pay at least as much as your tax liability for the previous year, then there will be no penalties. Now, you may be able to get away with paying less and not getting a big refund; or you may wish you had paid more and didn't owe so much in taxes in April. But no penalty if you follow this rule.
Here's the simple calculation:
1. Take the previous year's tax liablilty (NOT the amount you owed, but the total tax liability for the previous year)
2. Divide by four. That's how much you need to pay each quarter.
3. Subtract any withholding from wages paid for that quarter. What's left is your estimated tax payment.
There are lots of other ways to figure this out, that will get different amounts, but will have different risks of paying too much or too little. This is the simplest way that works most of the time.
By the way, be sure to read the next paragraph which says that "100%" is replaced with "110%" if you had high income in the previous year. Also note that state taxes have different formulas. California's is particularly weird.
Hope that helps.
