Many places claim that I must pay estimated tax, preferrably in equal installments, throughout the year. There are two weird issues around this that I am trying to make sense of.
My tax situation is that I mostly rely on employer withholdings, but I have to pay extra for the additional income, which is uneven throughout the year.
What prevents me from paying the entire estimated tax on Jan 15, 2023, if I make sure I hit 90% of the total 2022 tax (or 100% of 2021 tax, whichever is smaller)? Like, quarters 1,2,3 - zero, quarter 4: top it up to 90%. Per form 2210, I would not owe any penalty then. Are there some additional instructions by which the IRS will get me?
Is it true that with equal payments, I can be hit with substantial underpayment penalty if I miss the 90% threshold even by a little bit. The 2nd quarter is actually 2 months, but I am expected to pay 3 months worth of taxes. Here's how it works.
My (fictional) total tax liability for 2022: $24,000 a year. $2,000 a month. The employer withholds: $1,700 a month. To avoid the penalty I must pay: $1,800 a month Estimated tax to avoid the penalty: $100 a month $300 per quarter. Estimated tax actually paid: $299 per quarter.
For the 1st quarter (Jan-Mar) all looks logical:
Required tax: $6,000 Amount to avoid the penalty: $5,400 Employee withholding 3 months: $5,100 Estimated tax: $299 Underpayment: $1, not a big deal
But for the 2nd "quarter" (Apr-May):
Required tax: $6,000 Amount to avoid the penalty: $5,400 Employee withholding 3 months: $2,400 Estimated tax: $299 Underpayment: $1,701. Oops :(
Of course, there will be overpayment in quarter 4, but I would still owe 3 months of interest on $1700.
Thus, even if I make equal installements, it is quite dangerous to be even a little off the 90% mark, so why not just pay it as a lump sum in January (back to question 1)?