Annualized Income Installment Method

For most people, paying income tax happens automatically. You have a job and with every paycheck, some of the money gets held back by your employer and sent to the government. Since most people get paid a regular amount, these tax payments are the same every week or two weeks (or however often you get paid).

When you figure your taxes, you might end up with a refund, or you might end up having to pay a bit. But for the most part, there won't be any significant problems, because everything during the year took place on using a tortoise-beating-the-hare, slow-and-steady process.

Some people have a different rhythm to their work lives. Instead of getting paid in regular installments from an employer, they have a more feast-or-famine existence which leads to fluctuating income. Maybe they own a small business that operates seasonally. Maybe they are a budding sports star who just got drafted and is looking at a big signing bonus. Or maybe they work freelance or on a contract basis, and see large payments when projects are done and have to live off those profits in leaner months.

Whatever the particular reason, these situations can cause problems for figuring income taxes. Waiting until the end of the year and paying all at once can lead to large payments, and maybe even end up in delays that can induce penalties.

For these people, there is an option called the annualized income installment method. Basically, this structure allows people to figure out their estimated tax based on an assumption of what they will earn for the year. They can then pay this in regular installments. It allows people with fluctuating income to pay their income taxes with less cost and hassle.