US Estimated Taxes— what can I do if I had a very weak Q1, but expect a strong Q2-Q4?

Question

I'm self employed and when I have the contractor hours, I make good money, I'm faithful to set more money aside than I need for my taxes and I even set additional money in case I hit a "dry spell". Well, I'd been in a season of little work since October until mid-March.

Much of my savings intended to cover this type of period has been eaten up. My earnings in Q4 last year were low enough that I ended up getting a good tax refund, but that money has had to be used for general life.

Currently, I do have money set aside in my tax budget. The thing is, I think work is about to pick up and I expect to have full, 40 hour work weeks through the rest of the year, which should mean I'll be earning a fair amount of money this year. This means that my overall taxes for 2019 will be quite high. I use QB Self Employed and I have the money to cover what's estimated for this quarter, however,

I suspect since I'll have a sizable surge of income the rest of the year, when I go to file my taxes for 2019, it will look like I made an underpayment for Q1 and I'll be penalized by the IRS. I would normalize my expected, projected income, but at this time I do not have the cash to cover what I suspect to be my total, 1/4 tax burden for the entire year.

Is there something I can do to report a potentially low quarter, so that I can make a low tax payment for Q1 and not get penalized at the end of the year for an initial underpayment?

NOTE

I'm asking regarding US, Federal Taxes but I also live in NC. If anyone has any advice for NC, I'd appreciate that too, but I'm not directly asking for that information. But, if someone has some additional details on how to handle this in NC, I'd appreciate a comment on it, or a referenced link.

Answer 1

However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax.

https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

Answer 2

Another alternative -- run the numbers and decide whether to just take the hit.

Say your SE income ends up at $100k; with the standard deduction and the new 20% small-business deduction your tax including SE tax is about $30k, so nominally $27k should be paid in four equal quarters of about $6800. (Or with the safe harbor, less if last year's tax was under $27k and your AGI under $150k, but for this example let's assume not.)

Say you can pay only $3400 in April, but are able to make up the shortfall by paying $3400+$6800=$10200 in June. Using the default calculation (not annualizing) you owe 2 months penalty, currently about 0.5%, on the underpayment amount of $3800, or about $19. That's less than I pay for a (non-swanky) dinner out -- or a 64GB flash drive for work. It's not nothing, but it's not much either; your call.

And remember you aren't limited to paying on the standard dates. If you could make up the $3400 May 15 instead of June, the penalty is halved. Or maybe if you can't do it in June but can in July, you don't have to wait (and let the penalty grow more) until Sept.