Annualized income is an estimate of the sum of money that an individual or a business generates over a year's time. Annualized income is calculated with less than one year's worth of data, so it is only an approximation of total income for the year.
To avoid a penalty for tax underpayment, the total tax withholdings and estimated tax payments must equal to the lesser of 90% of the tax owed for the current year or the full tax owed the previous year.
To avoid underpayment penalties due to fluctuating income, the IRS Form 2210 allows you to annualize income for a particular quarter and compute the estimated tax payments based on that amount. Schedule AI of Form 2210 provides a column for each quarterly period, and the taxpayer annualizes the income for that period and computes an estimated tax payment based on that estimate.
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