I've recently started work as an independent contractor starting in April and I'm trying to calculate my estimated quarterly taxes for Q2. Line 15 on 1040-ES says:

"If the first payment you are required to make is due April 15, 2021, enter ¼ of line 14a (minus any 2020 overpayment that you are applying to this installment) here..."

I think the assumption here is if I were self-employed the entire year, I'd divide by 4 to get the quarterly payment from the estimated annual income.

But my first payment is actually due June 15, 2021 since I started working after March 31st. What exactly am I supposed put on this line here? Do I just divide by 3 instead (since I'll only work 3 out of 4 quarters of the year)? Is the IRS going to think I had this income for the whole year and skipped the Q1 payment? Doesn't say anything in the instructions.

  • Did you have any tax liability for 2020? – user102008 May 31 at 1:16

First of all, if you had no federal tax liability for 2020 (e.g. if you had no income in 2020 or had so little that it was below the standard deduction), and you were a US citizen or resident alien for all of 2020, you will not have a federal underpayment penalty for 2021, so you can just not pay any federal estimated taxes for 2021 and not suffer any consequences (as long as you save up enough to pay the taxes come tax filing time in 2022).

Otherwise, if you have to pay estimated taxes for 2021, you will have to use the Annualized Income Installment Method to calculate the required estimated taxes for each quarter. This is because if you take each quarter's required estimated taxes as 1/4 of the whole year's required estimated taxes, then you would have underpaid in the first quarter, since you didn't pay any estimated taxes in the first quarter. You didn't have any income in the first quarter, so you naturally didn't expect to need to pay estimated taxes for the first quarter; but your income increased in later quarters. This is precisely the situation that the Annualized Income Installment Method is for -- it allows you to calculate the required estimated taxes up to each quarter based on the income up to that quarter, so you are not penalized for increases in income in later quarters.

You should use the Annualized Estimated Tax Worksheet (Worksheet 2-7) in Publication 505 to calculate the amount of estimated tax you need to pay each quarter to avoid the penalty. (By the way, this is essentially identical to Schedule AI in Form 2210, except that 2021 Form 2210 doesn't come out until the end of 2021, so you can use the worksheet in Publication 505 in the meantime.)

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