I'm trying to plan out how I'm going to handle my US estimated taxes for 2017. I'm self employed and the amount of money I make each month varies quite a bit and is generally unpredictable, so it's not feasible for me to base my estimated tax payments off of last year's income -- I may end up making a lot less money than I did last year! While I am aware that the annualized income installment method is the preferred way to handle this, I'm wondering if I'm going to be penalized for doing the following:
For my 1st quarter estimated taxes, I calculate my annualized income based on income from January - March, calculate the year's taxes based on that, and pay 1/4 of it. (Fairly standard.)
For my 2nd quarter estimated taxes, I calculate my annualized income based on income from January - May (five months), calculate the year's taxes based on that, and pay 5/12 of that total minus my 1st quarter estimated taxes.
For my 3rd quarter estimated taxes, I calculate my annualized income based on income from January - August (eight months), calculate the year's taxes based on that, and pay 8/12 of that total minus my 1st and 2nd quarter estimated taxes.
For my 4th quarter estimated taxes, I take my actual income for the year, calculate the year's taxes based on that, and pay off the rest (i.e. the total minus my 1st, 2nd, and 3rd quarter estimated taxes.)
First, is this actually different from the annualized income installment method? (I'm having a hard time understanding exactly how it works.)
Second, this has a number of advantages that I like. For one, it has me pay very, very close to the actual total amount of taxes owed through all of my estimated taxes. Second, and more importantly, it takes into account the uneven distribution of estimated tax payment dates, so that I don't have to pay three months worth of taxes from two months worth of income in June. The last couple of years that's been hard for me to manage.
However, I'm worried I'm going to get penalized for doing this since it's (probably) non-standard. I tested it out by throwing in some numbers into TurboTax that reflect what I would've paid in estimated taxes had I done this for 2015, and it says my penalty is less than $10. I can live with that. But that's just from one test, and I'm not sure if there's other issues with doing this. For example, does it increase the chances of an audit? Or is there a possibility the penalty could be much higher?
Overall, is this a reasonable method for paying my estimated taxes?
I've confirmed that this is different from the annualized income installment method. It looks like I'm unlikely to incur much in the way of underpayment penalties using this method, but I'm still interested in hearing people's opinions.