Don't Mess With Taxes

Photo by Kay Bell

Spring has sprung, with the accompanying seasonal focus is on spring cleaning.

One of our neighbors is focusing on sprucing up their yard. The pile of dirt in the street, shown in the photo topping this post, is now being transferred to flowerbeds.

So, of course, it got me thinking about taxes.

While this household and other people on our block pay crews to mow their lawns even in the dead of winter (go figure), landscaping generally is seasonal work. These companies tend to make most of their income during the warmer months of the year.

They also are a good example of why you might want to reconsider forking over four equal estimated tax payments to the Internal Revenue Service.

Instead, look into whether the annualized income installment method is better choice for your income and tax situation.

Four equal payments preferred: The IRS prefers that all of us estimated tax payers come up with a good estimate of our earnings for the year and then send our 1040-ES payments in four equal installments.

Those due dates are the 15th of each April, June, September, and the next year’s January. Note the first estimated tax payment for 2025 is coming up on next month’s Tax Day.

That schedule is easy for the IRS to track. It's also generally easier for us taxpayers, too.

But it's not necessarily a good cashflow move.

If your earnings for which you must pay estimated taxes fluctuate during the year, you could owe a 1040-ES amount at a time when you haven't brought in any money.

That applies to freelance writers whose assignments typically aren’t on a fixed schedule. It also applies to companies who make most of their money during, for example, the December holidays or, in the case of our neighbors’ workers, spring planting.

In this case, the company likely makes most of its income, at least here in Central Texas, during the cooler spring and autumn when plants can get a good start before the serious hot summer or colder winter temperatures arrive.

But if you're sending the IRS the same estimated amounts for all quarters, regardless of when your get most of your money, you might find yourself struggling to come up with the regularly scheduled tax payment.

Instead, consider paying more precise estimated tax amounts during the quarters when you are earning.

Annualizing your estimated payments: This estimated tax payment option is known as the annualized income installment method.

Here, instead of making an estimate of your full year's expected income and then dividing that by four, you pay estimated tax for each period based on your actual taxable income for each time frame.

Going back to the lawn service income — and let me preface this by saying I do not know what it takes to run such a business, so I’m just using smaller, easy to calculate amounts in this example — let's say for the first quarter of 2025 you brought in just $15,000 as dormant lawns didn't need much tending.

That's the amount you'll use to calculate your estimated tax for the quarter ending March 31 and due by April 15.

Then spring arrives, followed by summer. Everything is blossoming and growing, including your income. For these next two estimated tax payment periods, you pay tax on the $30,000 you made in April and May (due June 15) and the $45,000 you took in June through August (due Sept. 15).

Then things drop off again. Some landscape winterizations from September through the end of the year brought in just $10,000. The tax on that is paid in your final estimated payment due on Jan. 15, 2026.

If you'd used the four equal installment method, you'd have been paying an equal amount of tax on a quarter of your $100,000 income four times. That's tax on $25,000 every estimated tax due date even when you didn't make nearly that much in some quarters. That could put you in a real cash bind trying to come up with your 1040-ES amounts some months.

But by calculating and paying estimated taxes on the more precise amount you made each payment period, you're essentially putting your self-employed self into a system that works more along the lines of paycheck income tax withholding.

That is, you pay your taxes closer to when you make the money and have it available to cover the tax bill.

Annualizing means more tax work: While the annualized income installment method means that your year-round cashflow is better, as least as far as taxes are concerned, it does cost you more work.

And more record keeping.

You also will likely have to show the IRS your estimated tax calculation work when you do file your annual return by also filling out and submitting Form 2210, officially titled Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

See more tax forms and more about them at Tax Forms 2024 and Tax Forms 2025.

This is because, as noted earlier, the U.S. tax system is pay as you earn. Underpay your total estimated amount or even just the amount due in one quarter, and you could get slapped with a penalty and interest.

Generally, if you do not make at least a minimum payment for a certain estimated tax payment period, you will owe a penalty. Yes, the penalty is figured separately for each installment due date, meaning you could owe a penalty for an earlier due date even if you paid enough tax later to make up the underpayment and end up getting a refund.

Remember, it's pay as you earn, including for estimated taxes.

Figuring each quarter: Form 2210 also comes in handy when, for example, you don't have any estimated tax income during first payment. When you suddenly show up making estimated taxes later in the year, the IRS tends to presume that you should have been paying all along.

You can use Form 2210 to show your annualized income installment method payments and file it with your tax return even if no penalty is owed.

By showing your estimated tax work on Form 2210, you'll let the IRS know that you did indeed pay the uneven, but appropriate, tax amounts four times based on your fluctuating earnings.

Yes, Form 2210 is a pain. Aren't you glad you have a tax professional or at least use software?

But for folks with uneven earnings, using the annualized income installment method of paying estimated taxes and subsequent added filing is usually worth it.

You also might find these items of interest:

• The scoop on estimated taxes
• Estimated taxes: Why, when, and how to pay them
• A quick estimated tax Q&A in advance of the deadline
• NTA urges Congress to change estimated tax deadlines (and more)

Advertisements

🌟 Search Amazon Tax Products 🌟
The text link above is an affiliate ad. If you click through and then buy a product, I receive a commission.