Underpayment Penalty for 2022

Al107,

As someone who has done Form 2210 calculations every quarter for decades because of income that did not come from paychecks, I believe I can assist.  But first, let me touch on the multiple paycheck withhold trap you may well have stumbled into.

The federal income tax is progressive, that is the percentage of tax get higher as income gets higher.  An employer is by default required to withhold at a level consistent with just the one income paid to the employee.  When the household has two coinciding paycheck incomes, the combined withholding tends to be at too low a level for the combined income of that household.  This can lead to owing taxes come April rather than receiving a refund and, in some cases like yours, to owing more than $1,000 at tax time, which triggers Form 2210.  You can use IRS Publication 15-T to look up what withholding would be applied to your combined paychecks and modify your W4 forms to add an extra amount per paycheck that causes the combined withholding to match the 15-T table lookup.  You can split the extra amount between the two paychecks if you want or just apply the total to one of them.

Putting this long aside aside, I advise you to pull down Form 2210 and its instructions from the IRS website.  The links are:

https://www.irs.gov/pub/irs-pdf/f2210.pdf

and

https://www.irs.gov/pub/irs-pdf/i2210.pdf

The Annualized Income is on page 3 of the form itself.  You then take the 1040 form and go through it line by line to fill in the income you received during each of the four periods ending in March, May, August, and December and add it up to an adjusted gross income for each period.  If you are choosing to itemize your deductions, you would do the same for Schedule A entries for each period.  Both the partial AGI and partial itemized deductions are annualized by the relevant factor.  These are used to compute an annualized taxable income and a corresponding amount that would be taxed on that income.  Finally the tax computed is divided back down by the annualization factor and 90% of the number is the minimum amount of tax that needs to have been paid to avoid underpayment penalty and interest.

As I have my own spreadsheets that I update each month, I've actually not used the TurboTax 2210 dialogues so I don't know how much assistance it gives, but the real slog is manually looking up and sorting income and itemized expenses into the 4 periods.  Once you have that the rest is filling in the AI table entries and I hope letting TurboTax calculate the rest of the table.

Okay, now for 2023 and beyond, estimated tax payments based on prior year income are an easy way to avoid running afoul of the Form 2210 underpayment trap.  The 2210 instructions tell you how much the minimum amount to have to add beyond payroll withholding  via estimated tax payments to reach 25% of of your prior year tax (or 110% of that if the prior year income was $150K or more.)

Finally, don't forget about state tax as well if you live in a state that has an income tax.  The same procedure applies (using state rules) and the safe harbor percentages can be different.