How to Use a Safe Harbor for Estimated Income Taxes
- 1). Calculate estimated tax payments according to the regular installment method by completing the worksheet on page 7 of IRS Form 1040-ES. This calculation uses an estimate of your annual taxable income. Use of the regular installment method results in four equal estimated tax payments. Penalties are assessed if the payment in any quarter is less than one-fourth of the total.
- 2). Complete the Annualized Estimated Tax Worksheet on page 40 of IRS Publication 505. This calculation method uses estimates of income per quarter. Users of the annualized income installment method must file Form 2210 with their income tax returns. The form shows income fluctuation throughout the year in order to avoid underpayment penalty for any estimated tax period.
- 3). Divide 100 percent of your prior year tax liability by 4. Use 110 percent of last year's tax if your adjusted gross income is more than $150,000 (or $75,000 if your filing status is married filing separately).
- 4). Pay the lowest safe harbor amount determined from the regular installment method, annualized income installment method, or one-fourth of prior year tax liability.
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