Question about income that varies throughout the year and whether to use the previous's year tax liability

[TaxFiler5467]

I'm a 1099 employee so I have to pay my own taxes. My income varies throughout the year so I was thinking of using the Annualized Income Installment Method but it seems a little complicated. I think the other option would be to use 100% of the previous year's tax bill and then divide it by 4 so I can pay each part quarterly? If so, I did not pay any federal income tax last year and only paid the self employment tax. Would I use that self employment tax liability as my number for this year's quarterly payments?

[CesarJ · Accepted solution]

No. Using the annualized method is the best way for your type of seasonal business. 

To use the annualized method for estimated tax payments in TurboTax Online, follow these steps:

1. Go to the Federal Taxes section.
2. Select Deductions & Credits.
3. Scroll to and open the Estimated Tax Payments or Penalty for Underpayment of Estimated Tax section.
4. When asked, select the option to use the annualized income installment method.
5. Enter your income and deductions as prompted for each period.

This method calculates your payments based on actual income earned, which can lower penalties if income varies throughout the year.

These payments must be made by the quarterly deadlines: April 15, June 15, September 15, and January 15 of the following year. Meeting these thresholds protects you from penalties even if you owe additional taxes at filing.

Keep in mind the IRS safe harbor rules help avoid penalties for underpayment of estimated taxes. To meet safe harbor and avoid penalties, you must pay either:

• 90% of the current year's tax liability through timely estimated payments or withholding, or
• 100% of last year's tax liability if your adjusted gross income (AGI) is under $150,000 ($110% if your AGI is $150,000 or more).

[TaxFiler5467]

Won't the annualized method prevent me from getting any penalties? 

[MonikaK1]

Using the annualized method may serve to reduce penalties that were calculated without that method if your income fluctuates throughout the year, as @CesarJ pointed out. You still need to make any required quarterly payments by the due dates. 

See this TurboTax blog article and this one for more information.

@TaxFiler5467 

[TaxFiler5467]

Yes, as I understand it, I would use the annualized method to determine what I should pay each quarter and they pay it before the due date of each quarter? And that way, I would avoid the penalty? At least that's what I understood from the turbotax and IRS articles.

@MonikaK1 

[MonikaK1]

Yes, the annualized method will calculate quarterly payments so that you would be required to make (or have made, if you are using this to lower the tentative penalty for 2025) higher payments during the time of the year when your income is higher and lower payments when your income is lower. 

The Federal quarterly estimated tax payments for the 2025 tax year were due on April 15, 2025, June 16, 2025, September 15, 2025, and January 15, 2026. 

The dates are the same every year, except that if the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that's not a Saturday, Sunday, or legal holiday.

See this IRS FAQ page for more information on estimated taxes.

@TaxFiler5467