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Taxmap/pubs/p505-024.htm#TXMP631288eb Regular Method for Figuring the Penalty

Regular Method for Figuring the Penalty

You must use the regular method in Part IV of Form 2210 to figure your penalty for underpayment of estimated tax if any of the following apply to you.

• You paid one or more estimated tax payments on a date other than the due date.
• You paid at least one, but less than four, installments of estimated tax.
• You paid estimated tax payments in unequal amounts.
• You use the annualized income installment method to figure your underpayment for each payment period.
• You use your actual withholding during each payment period to figure your payments.

If you use the regular method, figure your underpayment for each payment period in Section A, then figure your penalty for each payment period in Section B.

Taxmap/pubs/p505-024.htm#TXMP4db9930e Figuring Your Underpayment   (Section A of Part IV)

Estimated Tax

Figure your underpayment of estimated tax for each payment period in Section A following the line-by-line instructions. Complete each line for a payment period column before completing the next column.

Taxmap/pubs/p505-024.htm#TXMP166d84fb Required installment.

Your required payment for each payment period (line 18) is usually one-fourth of your required annual payment (Part I, line 9). However, if you are using the annualized income installment method (described later), first complete Schedule AI (Form 2210), and then enter the amounts from line 25 of that schedule on line 18 of Form 2210.

Taxmap/pubs/p505-024.htm#TXMP3b1db5f0 Payments.

On line 19, enter in each column the total of:

• Your estimated tax paid after the due date for the previous column and by the due date shown, and
• One-fourth of your withholding.

For special rules for figuring your payments, see the instructions for Form 2210.

If you file Form 1040, your withholding is the amount on line 63, plus any excess social security or railroad retirement tax withholding on line 66. If you file Form 1040A, your withholding is the amount on line 39.

Taxmap/pubs/p505-024.htm#TXMP0601e7bf Actual withholding method.

Instead of using one-fourth of your withholding for each quarter, you can choose to use the amounts actually withheld by each due date. You can make this choice separately for the tax withheld from your wages and for all other withholding.

Using your actual withholding may result in a smaller penalty if most of your withholding occurred early in the year.

If you use your actual withholding, you must check box D, Part II of Form 2210 and complete Form 2210 and file it with your return.

Taxmap/pubs/p505-024.htm#TXMP238e1cbe Regular Installment Method

Regular Installment Method

Taxmap/pubs/p505-024.htm#TXMP210f643b
Example 4.6.

Ben Brown's 2004 total tax (Form 1040, line 62) is $7,031, the total of his $4,685 income tax and $2,346 self-employment tax. His 2003 AGI was less than $150,000. He does not owe any other taxes or claim any credits other than for withholding. His 2003 tax was $6,116.

Ben's employer withheld $3,228 income tax during 2004. Ben paid no estimated tax for either the first or second period, but he paid $1,000 each on September 2, 2004, and January 12, 2005, for the third and fourth periods. Because the total of his withholding and estimated tax payments, $5,228 ($3,228 + $1,000 + $1,000), was less than 90% of his 2004 tax ($6,328), and was also less than his 2003 tax ($6,116), Ben knows he owes a penalty for underpayment of estimated tax. He decides to figure the penalty on Form 2210 and pay it with his $1,803 tax balance ($7,031 − $5,228) when he files his tax return on April 15, 2005.

Ben's required annual payment (Part I, line 9) is $6,116. Because his income and withholding were distributed evenly throughout the year, Ben enters one-fourth of his required annual payment, $1,529, in each column of line 18. On line 19, he enters one-fourth of his withholding, $807 in the first two columns and $1,807 ($807 plus $1,000 estimated tax payment) in the last two columns.

Ben has an underpayment (line 25) for each payment period even though his withholding and estimated tax payments for the third and fourth periods were more than his required installments (line 18). This is because the estimated tax payments made in the third and fourth periods are first applied to underpayments for the earlier periods. Page 1 and Section A of Part IV of Ben's Form 2210 are shown at the end of this chapter.

Taxmap/pubs/p505-024.htm#TXMP2c836e15 Annualized Income Installment Method (Schedule AI)

Annualized Income Installment Method

If you did not receive your income evenly throughout the year (for example, your income from a repair shop you operated was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment (line 18) for one or more payment periods may be less than one-fourth of your required annual payment.

To figure your underpayment using this method, complete Schedule AI of Form 2210. The schedule annualizes your tax at the end of each payment period based on your income, deductions, and other items relating to events that occurred since the beginning of the tax year through the end of the period.

If you use the annualized income installment method, you must check box C on Form 2210. You also must attach Form 2210 and Schedule AI to your return.

If you use Schedule AI for any payment due date, you must use it for all payment due dates.

Taxmap/pubs/p505-024.htm#w15008e12

Table 4-1.  Calendar To Determine the Number of Days a Payment Is Late Tax Year 2004 Day of 2004 2004 2004 2004 2004 2004 2004 2004 2004 2005 2005 2005 2005 Month April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. 1   16 47 77 108 139 169 200 230 261 292 320 351 2   17 48 78 109 140 170 201 231 262 293 321 352 3   18 49 79 110 141 171 202 232 263 294 322 353 4   19 50 80 111 142 172 203 233 264 295 323 354 5   20 51 81 112 143 173 204 234 265 296 324 355                                6   21 52 82 113 144 174 205 235 266 297 325 356 7   22 53 83 114 145 175 206 236 267 298 326 357 8   23 54 84 115 146 176 207 237 268 299 327 358 9   24 55 85 116 147 177 208 238 269 300 328 359 10   25 56 86 117 148 178 209 239 270 301 329 360                                11   26 57 87 118 149 179 210 240 271 302 330 361 12   27 58 88 119 150 180 211 241 272 303 331 362 13   28 59 89 120 151 181 212 242 273 304 332 363 14   29 60 90 121 152 182 213 243 274 305 333 364 15 0 30 61 91 122 153 183 214 244 275 306 334 365                                16 1 31 62 92 123 154 184 215 245 276 307 335   17 2 32 63 93 124 155 185 216 246 277 308 336   18 3 33 64 94 125 156 186 217 247 278 309 337   19 4 34 65 95 126 157 187 218 248 279 310 338   20 5 35 66 96 127 158 188 219 249 280 311 339                                  21 6 36 67 97 128 159 189 220 250 281 312 340   22 7 37 68 98 129 160 190 221 251 282 313 341   23 8 38 69 99 130 161 191 222 252 283 314 342   24 9 39 70 100 131 162 192 223 253 284 315 343   25 10 40 71 101 132 163 193 224 254 285 316 344                                  26 11 41 72 102 133 164 194 225 255 286 317 345   27 12 42 73 103 134 165 195 226 256 287 318 346   28 13 43 74 104 135 166 196 227 257 288 319 347   29 14 44 75 105 136 167 197 228 258 289   348   30 15 45 76 106 137 168 198 229 259 290   349                                  31   46   107 138   199   260 291   350

Taxmap/pubs/p505-024.htm#TXMP67533a4c Completing Schedule AI of Form 2210.

Follow your Form 2210 instructions to complete Schedule AI. For each period shown on Schedule AI, figure your income and deductions based on your method of accounting. If you use the cash method of accounting (used by most people), include all income actually or constructively received during the period and all deductions actually paid during the period.

Taxmap/pubs/p505-024.htm#TXMP7c533837 Note.

Each period includes amounts from the previous period(s).

• Period (a) includes items for January through March.
• Period (b) includes items for January through May.
• Period (c) includes items for January through August.
• Period (d) includes items for the entire year.

Taxmap/pubs/p505-024.htm#TXMP3814557a Example 4.7.

Betty Beige is in the same situation as Ben Brown in Example 4.6, except that her income tax is $3,741. Her required annual payment on Form 2210, Part I, line 9 is $5,478 (the lower of her $6,116 tax for 2003 or 90% of her $6,087 total tax for 2004). Betty did not receive her income evenly throughout the year. Therefore, she decides to figure her required installment for each period (line 18 of Form 2210) using the annualized income installment method.

Betty's filled-in Schedule AI and Section A of Part IV of Form 2210 using this method are shown at the end of this chapter.

Betty's wages during 2004 were $21,000 ($1,750 a month). Her net earnings from a business she started during the year were $16,600, received as follows:

April through May	$4,600
June through August	4,000
September through December	8,000

Before Betty can figure her adjusted gross income for each period (line 1 of Schedule AI), she must figure her deduction for self-employment tax for each period. She completes Part II of Schedule AI first. She figures the deduction for self-employment tax by dividing the amounts on line 34 by the annualization amounts for each period. The annualization amounts are 8 for the first period, 4.8 for the second period, 3 for the third period, and 2 for the fourth period.

Betty had $6,000 in itemized deductions for 2004. She divided them by period in the following manner.

• 1st period ($1,500). $250 a month withheld in state and local taxes, and $250 a month in mortgage interest X 3 months.
• 2nd period ($2,500). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 5 months.
• 3rd period ($4,000). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 8 months.
• 4th period ($6,000). $250 a month withheld in state and local taxes and $250 a month in mortgage interest X 12 months.

She enters each amount on line 4 in the proper column for that period.

Betty had no self-employment income for the first period, so she leaves the lines in that column blank. Her self-employment income was $4,600 for the second period, $8,600 ($4,600 + $4,000) for the third period, and $16,600 ($8,600 + $8,000) for the fourth period. She multiplies each amount by 92.35% (.9235) to find the amounts to enter on line 26. She then fills out the rest of Part II.

Betty figures the amounts to enter on line 1 of Schedule AI as follows:

1st Column - 1/1/04 to 3/31/04:
$1,750 per month × 3 months			$5,250
2nd Column - 1/1/04 to 5/31/04: $1,750 per month × 5 months			$8,750
Plus:	Self-employment income through 5/31/04		4,600
Less:	Self-employment tax deduction ($1,560 ÷ 4.8)		(325)
			$13,025
3rd Column - 1/1/04 to 8/31/04: $1,750 per month × 8 months			$14,000
Plus:	Self-employment income through 8/31/04		8,600
Less:	Self-employment tax deduction ($1,822 ÷ 3)		(607)
			$21,993
4th Column - 1/1/04 to 12/31/04:
$1,750 per month × 12 months			$21,000
Plus:	Self-employment income through 12/31/04		16,600
Less:	Self-employment tax deduction ($2,346 ÷ 2)		(1,173)
			$36,427

Betty completes the rest of Schedule AI to determine the amounts to put on Form 2210, line 18.

Betty then figures her underpayment in Part IV, Section A. She finds that she overpaid her estimated tax for the first and third payment periods, but she underpaid her estimated tax for the other two periods. Example 4.9 illustrates how Betty completes Part IV, Section B, of her Form 2210.

Taxmap/pubs/p505-024.htm#TXMP7a34b3b8 Figuring Your Penalty (Section B of Part IV)

Penalty

Figure the amount of your penalty in Section B, Part IV of Form 2210, following the instructions. The penalty is imposed on each underpayment shown on line 25, Section A, for the number of days that it remained unpaid. (You may find it helpful to show the date of payment beside each amount on line 25.)

There are four rate periods to figure the penalty. Use Rate Period 1 (lines 27 and 28) to apply the 5% rate in effect between April 16, 2004, and June 30, 2004. Use Rate Period 2 (lines 29 and 30) to apply the 4% rate in effect between July 1, 2004, and September 30, 2004. Use Rate Period 3 (lines 31 and 32) to apply the 5% rate in effect between October 1, 2004, and December 31, 2004. Use Rate Period 4 (lines 33 and 34) to apply the 5% rate in effect between January 1, 2005, and April 15, 2005.

Taxmap/pubs/p505-024.htm#TXMP2f4b8586 Aid for counting days.

Table 4–1 provides a simple method to count the number of days between payment dates or between a due date and a payment date.

1. Find the number for the date the payment was due by going across to the column of the month the payment was due and moving down the column to the due date.
2. In the same manner, find the number for the date the payment was made.
3. Subtract the due date "number" from the payment date "number."

For example, if a payment was due on June 15 (61), but was not paid until November 4 (203), the payment was 142 (203 − 61) days late.

Taxmap/pubs/p505-024.htm#TXMP53e29077 Payments.

Before completing Section B, make a list of the payments you made after the due date (or the last day payments could be made on time) for the earliest payment period an underpayment occurred. For example, if you had an underpayment for the first payment period, list your payments after April 15, 2004. You can use the tables in the Form 2210 instructions to make your list. Follow those instructions for listing income tax withheld and payments made with your return. Use the list to determine when each underpayment was paid.

Taxmap/pubs/p505-024.htm#TXMP364c295b Underpayment paid in two or more parts.

If an underpayment was paid in two or more parts on different dates, you must figure the penalty separately for each part. (You may find it helpful to show the underpayment on line 25, Section A, broken down into the parts paid on different dates.)

Taxmap/pubs/p505-024.htm#TXMP5a3f934a Figuring the penalty.

Form 2210 for 2004 has 4 rate periods. Figure the underpayment penalty by applying the appropriate rate against each underpayment shown on line 25. If an underpayment remained unpaid for more than one rate period, the penalty on that underpayment will be figured using more than one rate.

Use lines 27, 29, 31, and 33 to figure the number of days the underpayment remained unpaid. (Also see Table 4–1.) Use lines 28, 30, 32, and 34 to figure the actual penalty amount by applying the rate against the underpayment for the number of days it remained unpaid.

If an underpayment remained unpaid for the entire period, use Table 4–2 to determine the number of days to enter for each period.

Table 4-2 Chart of Total Days

	Column (a)	Column (b)	Column (c)	Column (d)
line 27	76	15	NA	NA
line 29	92	92	15	NA
line 31	92	92	92	NA
line 33	105	105	105	90

Taxmap/pubs/p505-024.htm#TXMP4073b64b Example 4.8.

In Example 4.6, Ben Brown determined that he had an underpayment for all four payment periods.

Section B of Part IV of Form 2210 is shown at the end of this chapter.

Ben's 2004 tax is $7,031. His minimum required payment for each period is $1,529 ($6,116 ÷ 4). His $3,228 withholding is considered paid in four equal installments of $807, one on each payment due date. Therefore, he must make estimated tax payments of $722 each period. Ben made estimated tax payments of $1,000 on September 2, 2004, and $1,000 on January 12, 2005. He plans to file his return and pay his $1,803 tax balance ($7,031 tax – $5,228 withholding and estimated tax payments) on April 15, 2005. Therefore, he is considered to have made the following payments for tax year 2004.

	April 15, 2004	$ 807
	June 15, 2004	807
	September 2, 2004	1,000
	September 15, 2004	807
	January 12, 2005	1,000
	January 15, 2005	807
	April 15, 2005	1,803

Taxmap/pubs/p505-024.htm#TXMP0d3a4a17 Penalty for first period (April 15, 2004) – column (a).

Ben's $722 underpayment for the first payment period was paid by applying $722 of his $807 payment on June 15, 2004. The $722 remained unpaid 61 days (April 16 through June 15, 2004). Ben enters "61" on line 27 and figures this part of the penalty on line 28.

Taxmap/pubs/p505-024.htm#TXMP0d0fd1cb Penalty for second period (June 15, 2004) – column (b).

Ben figures his second period underpayment as follows.

1. Of the $807 he paid for the second period, $722 is applied to the underpayment remaining from the first period.
2. That leaves $85 ($807 – $722) to apply to his second period required installment of $1,529.
3. The result, $1,444 ($1,529 − $85) is Ben's underpayment for the second period.

The $1,444 underpayment is paid in two parts by applying the $1,000 paid on September 2 and $444 of his $807 September 15 payment. To help him figure his penalty, Ben shows each part of the underpayment paid on different dates on line 25.

For Rate Period 1, the entire underpayment remained unpaid 15 days (June 16 through June 30). Ben enters "15" on line 27 and figures this part of his penalty on line 28.

For Rate Period 2, $1,000 of the underpayment remained unpaid for 64 days (July 1 through September 2) and $444 remained unpaid for 77 days (July 1 through September 15). Ben enters "64" and "77" on line 29. He figures this part of the penalty on line 30 by adding the result of the two penalty computations.

Taxmap/pubs/p505-024.htm#TXMP09273bc6 Penalty for third period (September 15, 2004) – column (c).

Ben figures his third period underpayment as follows.

1. Of the $1,807 he paid for the third period, $1,444 is applied to the underpayment remaining from the second period.
2. That leaves $363 ($1,807 − $1,444) to apply to his third period required installment of $1,529.
3. The result, $1,166 ($1,529 − $363) is Ben's underpayment for the third period.

The $1,166 underpayment is paid in two parts by applying his $1,000 payment on January 12, 2005, and $166 of his $807 payment on January 15. On line 25, Ben shows each part of the underpayment paid on different dates.

For Rate Period 2, the entire underpayment remained unpaid 15 days (September 16 through September 30). Ben enters "15" on line 29 and figures this part of his penalty on line 30.

For Rate Period 3, the entire underpayment remained unpaid 92 days (October 1 through December 31). Ben enters "92" on line 31 and figures this part of his penalty on line 32.

For Rate Period 4, $1,000 of the underpayment remained unpaid for 12 days (January 1 through January 12) and $166 remained unpaid for 15 days (January 1 through January 15). Ben enters "12" and "15" on line 33 and figures his penalty for each part of the underpayment on line 34. He includes all penalty amounts on line 34.

Taxmap/pubs/p505-024.htm#TXMP16a4097f Penalty for fourth period (January 15, 2005) – column (d).

Ben figures his fourth period underpayment as follows.

1. Of the $1,807 he paid for the fourth period, $1,166 is applied to the underpayment remaining from the third period.
2. That leaves $641 ($1,807 − $1,166) to apply to his fourth period required installment of $1,529.
3. The result, $888 ($1,529 − $641) is Ben's underpayment for the fourth period.

The $888 underpayment was paid April 15, 2005, with his tax return. The $888 remained unpaid 90 days (January 16 through April 15, 2005). Ben enters that number on line 33 and figures his penalty on line 34.

Taxmap/pubs/p505-024.htm#TXMP7b7e2ff0 Total penalty.

Ben's total penalty for 2004 on line 35 is $49.20, the total of all amounts on lines 28, 30, 32, and 34 in all columns. Ben enters that amount on line 75 of his Form 1040. He also adds $49 to his $1,803 tax balance and enters the $1,852 total on line 74. He files his return on April 15 and includes a check for $1,852. He keeps his completed Form 2210 for his records.

Taxmap/pubs/p505-024.htm#TXMP5968870c Example 4.9.

In Example 4.7, Betty Beige's first underpayment was for the second payment period.

This example illustrates completion of Part IV, Section B, of Betty's Form 2210 under the annualized income installment method. Section B of Part IV of Form 2210 is shown at the end of this chapter.

Betty made the same payments listed in the table in Example 4.8 except that her final payment on April 15, 2005, was $859.

Taxmap/pubs/p505-024.htm#TXMP1a6c565b Penalty for second period – column (b).

Betty's $424 underpayment for the second payment period was paid by applying $424 of her $1,000 September 2, 2004, payment. To help her figure her penalty, Betty shows the date the underpayment was paid on line 25.

For Rate Period 1, the entire underpayment remained unpaid for 15 days (June 16 through June 30). Betty enters "15" on line 27 and figures this part of her penalty on line 28.

For Rate Period 2, the entire underpayment remained unpaid for 64 days (July 1 through September 2). Betty enters "64" on line 29 and figures this part of her penalty on line 30.

Taxmap/pubs/p505-024.htm#TXMP6e2c0a6a Penalty for fourth period – column (d).

Betty's $250 underpayment for the fourth payment period was paid on April 15, 2005, with her tax return. The entire amount remained unpaid 90 days (January 16 through April 15, 2005). Betty enters that number on line 33 and figures this part of her penalty on line 34.

Taxmap/pubs/p505-024.htm#TXMP28629492 Total penalty.

Betty's total penalty for 2004 on line 35 is $6.92, the total of all amounts on lines 28, 30, 32, and 34 in all columns. Betty enters that amount on line 75 of her Form 1040. She also adds $7 to her $859 tax balance and enters the $866 total on line 74. She files her return on April 15 and includes a check for $866. Because she used the annualized income installment method, she must attach Form 2210, including Schedule AI, to her return and check box C of Form 2210.

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