My husband became a partner at his law firm this year and so this is the first year we are having to pay estimated quarterly taxes. I am confused about why one would be expected to pay 4 equal payments when the schedule for paying taxes is unequal (April, June, Sept, Jan)? Why would the government essentially expect you to pay taxes on income you haven't earned yet? My husband's salary is consistent, but the end of the year draw will fluctuate based on the firm's earnings.

As an example, if we figure we will owe $45,000 in taxes for 2015, 4 equal payments would require us to pay $11,250 each quarter.

If instead we prorate the amount we pay based on how many paychecks are in the time period for each quarter, will we be penalized? For example, 1st quarter we would pay $10,380, 2nd quarter $8,650, 3rd quarter $10,380, and 4th quarter $15,570.

The above is based on the fact that 1st quarter includes 12 weeks, 2nd quarter 10 weeks, 3rd quarter 12 weeks, and 4th quarter 18 weeks.

  • We are in the U. S. – kate May 8 '15 at 14:08
  • 2
    money.stackexchange.com/questions/26472/… suggests that payment dates are just shifted but payment would be due for said quarter of the year. So it is my understanding that the quarters are about equal length hence the payments are equal. – Ghanima May 8 '15 at 14:08
  • Yes, as Keshlam says, you can vary the amounts. I just find it's easier to pay the same amount at each time. Less thought required, and less error prone. – Peter K. May 8 '15 at 14:55
  • Why does the change in employment status mean you have to pay estimated taxes? Are partners not subject to withholding? – dg99 May 8 '15 at 22:55
  • @Ghanima #26472 says, correctly, there are three options: pay equal amounts for each slightly-unequal quarter that total 90% of current year's tax, OR 100%/110% of previous year's tax, OR compute an annualized amount for each slightly-unequal quarter that can be different, and is typically chosen only when it is different. – dave_thompson_085 May 9 '15 at 12:44

Varying the amount to reflect income during the quarter is entirely legitimate -- consider someone like a salesman whose income is partly driven by commissions, and who therefore can't predict the total. The payments are quarterly precisely so you can base them on actual results.

Having said that, I suspect that as long as you show Good Intent they won't quibble if your estimate is off by a few percent. And they'll never complain if you overpay. So it may not be worth the effort to change the payment amount for that last quarter unless the income is very different.

  • Yes, the amount can be varied. I just find it easier to deal with uniform amounts each payment time, even if the times are not uniformly spread. One less thing to think about. – Peter K. May 8 '15 at 14:54
  • I agree that it would be easier!However, cash flow is the issue right now for us. I am finishing my master's degree and working minimally. If you vary the amounts, are you required to fill out the annualization paperwork? My husband mentioned the idea of paying varying amounts to the CPA at the firm, and she felt this would not be possible because it would affect how the other partners paid their taxes as well. She eluded to the idea that "you all need to do the same thing" due to the partnership agreement. – kate May 8 '15 at 15:05
  • That, I can't answer... but if you have a cpa's advice i'd suggest you go with that rather than mine. – keshlam May 8 '15 at 18:47

You may want, or at least be thinking of, the annualized method described in Pub 505 http://www.irs.gov/publications/p505/ch02.html#en_US_2015_publink1000194669 (also downloadable in PDF) and referred to in Why are estimated taxes due "early" for the 2nd and 3rd quarters only? .

This doesn't prorate your payments as such; instead you use your income and deductions etc for each of the 3,2,3,4-month "quarters" to compute a prorated tax for the partial year, and pay the excess over the amount already paid. If your income etc amounts are (nearly) the same each month, then this computation will result in payments that are 3,2,3,4/12ths of 90% of your whole-year tax, but not if your amounts vary over the year.

If you do use this method (and benefit from it) you MUST file form 2210 schedule AI with your return next filing season to demonstrate that your quarterly computations, and payments, met the requirements. You need to keep good per-period (or per-month) records of all tax-relevant amounts, and don't even try to do this form by hand, it'll drive you nuts; use software or a professional preparer (who also uses software), but I'd expect someone in your situation probably needs to do one of those anyway.

But partnership puts a wrinkle on this. As a partner, your taxable income and expense is not necessarily the cash you receive or pay; it is your allocated share of the partnership's income and expenses, whether or not they are distributed to you. A partnership to operate a business (like lawyers, as opposed to an investment partnership) probably distributes the allocated amounts, at least approximately, rather than holding them in the partnership; I expect this is your year-end draw (technically a draw can be any allowed amount, not necessarily the allocated amount). In other words, your husband does earn this money during the year, he just receives it at the end.

If the year-end distribution (or allocation if different) is significant (say more than 5% of your total income) and the partnership is not tracking and reporting these amounts (promptly!) for the IRS quarters -- and I suspect that's what they were telling you "affects other partners" -- you won't have the data to correctly compute your "quarterly" taxes, and may thus subject yourself to penalty for not timely paying enough. If the amount is reasonably predictable you can probably get away with using a conservative (high-side) guess to compute your payments, and then divide the actual full-year amounts on your K-1 over 12 months for 2210-AI; this won't be exactly correct, but unless the partnership business is highly seasonal or volatile it will be close enough the IRS won't waste its time on you.

PS- the "quarters" are much closer to 13,9,13,17 weeks. But it's months that matter.

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