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My question is related to this one (Do I have to pay estimated taxes if my income will be much lower this year?) but in the opposite direction.

Last year my wife started a new business and with all the investments we poured into it, we were able to report a loss from business for Schedule C in 2015 and thus we ended up getting a 2015 tax refund for the taxes withheld by my job.

Now, this year we anticipate making more money and having to pay taxes beyond just my taxes withheld by my employer. I'm working through the 2016 Estimated Tax Worksheet (1040-ES) and line 14c, the "required annual payment to avoid a penalty" is the smaller of either 90% of our 2016 total estimated tax or our "required annual payment based on prior year's tax". Last year this was a whopping $162.

Am I interpreting correctly that I only need to pay $162/4 = $40.50 per quarter to avoid a penalty even if I anticipate making more money this year than last? I know if this is all I pay that I'll likely have to pay more at the end of the year, but I'm okay with that, I just want to avoid the penalty.

I want to make sure I'm interpreting this correctly since I've read so much about penalties if you underpay...

  • Note that the penalties for underpaying estimated taxes are very small providing you do pay the full amount due by April 15. – David Schwartz Oct 26 '17 at 22:16
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You're interpreting this correctly. Furthermore, if your total tax liability is less than $1000, you can not pay estimates at all, just pay at the tax day.

See this safe harbor rule in the IRS publication 17:

General rule. In most cases, you must pay estimated tax for 2016 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2016, after subtracting your withholding and refundable credits.

  2. You expect your withholding plus your refundable credits to be less than the smaller of:

    • 90% of the tax to be shown on your 2016 tax return, or

    • 100% of the tax shown on your 2015 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers , later). Your 2015 tax return must cover all 12 months.

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