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.

Figuring Your Underpayment (Section A of Part IV)

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.

Required installment. Your required payment for each payment period (line 22) is usually one-fourth of your required annual payment (Part II, line 14). 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 26 of that schedule on line 22 of Form 2210.

Payments. On line 23, enter in each column the total of:

1. Your estimated tax paid after the due date for the previous column and by the due date shown, and
2. 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 58, plus any excess social security or railroad retirement tax withholding on line 61. If you file Form 1040A, your withholding is the amount on line 36, plus any excess social security or railroad retirement tax withholding included in the total on line 40.

Actual withholding method. Instead of using one-fourth of your withholding to figure your payments, you can choose to establish how much was actually withheld by the due dates and use those amounts. 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 the box on line 1c, Part I of Form 2210 and complete Form 2210 and file it with your return.

Calendar to determine number of days a payment is late

Regular Installment Method

The filled-in form for the following example is shown at the end of this chapter.

Example 4.6. Ben Brown's 2000 total tax (Form 1040, line 57) is $7,031, the total of his $4,685 income tax and $2,346 self-employment tax. (His 1999 AGI was less than $150,000.) He does not owe any other taxes or claim any credits other than for withholding. His 1999 tax was $6,116.

Ben's employer withheld $3,228 income tax during 2000. Ben made no estimated tax payment for either the first or second period, but he paid $1,000 each on September 2, 2000, and January 12, 2001, 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 2000 tax ($7,031), and was also less than his 1999 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 16, 2001.

Ben's required annual payment (Part II, line 14) 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 22. On line 23, 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 29) 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 22). This is because the estimated tax payments made in the third and fourth periods are first applied to underpayments for the earlier periods. Example 4.8 illustrates completion of Part IV, Section B, of Ben's Form 2210.

Annualized Income Installment Method (Schedule AI)

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 22) 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 the box on line 1b of Form 2210. You also must attach Form 2210 and Schedule AI to your return.

If you use Schedule A1 for any payment due date, you must use it for all payment due dates.

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.

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.

Example 4.7. The facts are the same as in Example 4.6, except that Ben did not receive his income evenly throughout the year. Therefore, he decides to figure his required installment for each period (line 22 of Form 2210) using the annualized income installment method.

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

Ben's wages during 2000 were $21,000 ($1,750 a month). His net earnings from a business he started during the year were $16,600, received as follows:

Before Ben can figure his adjusted gross income for each period (line 1 of Schedule AI), he must figure his deduction for self-employment tax for each period. He completes Part II of Schedule AI first.

Ben had no self-employment income for the first period, so he leaves the lines in that column blank. His 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. He multiplies each amount by 92.35% (.9235) to find the amounts to enter on line 27. He then fills out the rest of Part II.

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

Ben completes the rest of Schedule A1 to determine the amounts to put on Form 2210, line 22.

Ben then figures his underpayment in Part IV, Section A. He finds that he overpaid his estimated tax for the first payment period, but he underpaid his estimated tax for the other three periods. Example 4.9 illustrates how Ben completes Part IV, Section B, of his Form 2210.

Figuring Your Penalty (Section B of Part IV)

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 29, Section A, for the number of days through April 15, 2001, that it remained unpaid. (You may find it helpful to show the date of payment beside each amount on line 29.)

One penalty rate applies to 2000 underpayments. The rate is 9% from April 16, 2000, through April 15, 2001.

Note. Even though only one penalty rate applies to 2000 underpayments, Part IV of Form 2210 has two rate periods. A separate rate period is needed for 2000 because 2000 is a leap year.

9% rate period. To figure the number of days the 9% rate applies (line 31), count from the day after the payment due date shown in each column above line 31 through the earlier of:

1. The day the underpayment was paid, or
2. April 15, 2001.

Or you can use Table 4-1.

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.
2. 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.

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, 2000. 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.

A payment made on January 16, 2001, is considered to have been made on the January 15 due date to the extent it is applied to a payment due on January 15. Any portion applied to an underpayment for an earlier period is considered paid January 16.

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 29, Section A, broken down into the parts paid on different dates.)

Figuring the penalty. Form 2210 for 2000 has two rate periods. Figure the underpayment penalty by applying the appropriate rate against each underpayment shown on line 29. 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 31 and 33 to figure the number of days the underpayment remained unpaid. (Also see Table 4-1.) Use lines 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 in each column of line 31 or 33.

Example 4.8. In Example 4.6, Ben Brown determined that he had an underpayment for all four payment periods.

Ben's filled-in Form 2210 is shown at the end of this chapter. This example illustrates Part IV, Section B, of that form.

Ben's 2000 tax is $7,031. His minimum required payment for each period is $1,529 ($6,116 x 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, 2000, and $1,000 on January 12, 2001. 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, 2001. Therefore, he is considered to have made the following payments for tax year 2000:

Penalty for first period (April 15, 2000) -- column (a). Ben's $722 underpayment for the first payment period was paid by applying $722 of his $807 payment on June 15, 2000. The $722 remained unpaid 61 days (April 16 through June 15, 2000). Ben enters "61" on line 31 and figures his penalty on line 32.

Penalty for second period (June 15 2000) -- 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 29.

Ben must figure the penalty using Part IV, Section B of Form 2210.

$1,000 of the underpayment remained unpaid 79 days (June 16 through September 2). $444 of the underpayment remained unpaid 92 days (June 16 through September 15). Ben enters "79" and "92" on line 31. He multiplies $1,000 by 79 divided by 366 and multiplies that by .09. The result is $19. He then multiplies $444 by 92 divided by 366 and multiplies that by .09. The result is $10. He enters both penalty amounts ($19 and $10) and their total ($29) on line 32.

Penalty for third period (September 15, 2000) -- 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, 2000, and $166 of his $807 payment on January 15. On line 29, Ben shows each part of the underpayment paid on different dates.

Ben must figure the penalty using the rate period as shown on page 2 of Form 2210.

For Rate Period 1, the entire $1,166 underpayment remained unpaid 107 days (September 16 through December 31, 2000). Ben enters "107" on line 31 and figures the penalty on line 32.

For Rate Period 2, $1,000 of the underpayment remained unpaid 12 days (January 1, 2001, through January 12, 2001) and $166 remained unpaid 15 days (January 1, 2001, through January 15, 2001). Ben enters those numbers on line 33 and figures his penalty for each part of the underpayment on line 34. He includes both penalty amounts on line 35.

Penalty for fourth period (January 15, 2001) -- 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 16, 2001, with his tax return. The $888 remained unpaid 90 days (January 16 through April 15, 2001). Ben enters that number on line 33 and figures his penalty on line 34.

Total penalty. Ben's total penalty for 2000 on line 35 is $94, the total of all amounts on lines 32 and 34 in all columns. Ben enters that amount on line 70 of his Form 1040. He also adds $94 to his $1,803 tax balance and enters the $1,897 total on line 69. He files his return on April 16 and includes a check for $1,897. He keeps his completed Form 2210 for his records.

Example 4.9. In Example 4.7, Ben Brown's first underpayment was for the second payment period.

Ben's filled-in Schedule AI and Part IV of Form 2210 are shown at the end of this chapter. This example illustrates completion of Part IV, Section B, of Ben's Form 2210 under the annualized income installment method.

Ben made the same payments listed in the table in Example 4.8.

Penalty for second period -- column (b). Ben's $605 underpayment for the second payment period was paid by applying $605 of his $1,000 September 2, 2000 payment. To help him figure his penalty, Ben shows the date the underpayment was paid on line 29.

Ben must figure the penalty using the rate period as shown in Part IV, Section B of Form 2210.

The entire underpayment remained unpaid 79 days (June 16 to September 2). Ben enters "79" on line 31 and figures the penalty on line 32.

Penalty for third period -- column (c). Ben's $256 underpayment for the third payment period was paid by applying $256 of his $1,000 payment on January 12, 2001.

Ben must figure the penalty using the rate periods as shown in Part IV, Section B of Form 2210.

For Rate Period 1, the entire $256 underpayment remained unpaid 107 days (September 16 through December 31, 2000). Ben enters "107" on line 31 and figures the penalty on line 32.

For Rate Period 2, the entire $256 underpayment remained unpaid 12 days (January 1, 2001, through January 12, 2001). Ben enters "12" on line 33 and figures the penalty on line 34.

Penalty for fourth period -- column (d). Ben's $774 underpayment for the fourth payment period was paid on April 16, 2001, with his tax return. The $774 remained unpaid 90 days (January 16 through April 15, 2001). Ben enters that number on line 33 and figures his penalty on line 34.

Total penalty. Ben's total penalty for 2000 on line 35 is $37, the total of all amounts on lines 32 and 34 in all columns. Ben enters that amount on line 70 of his Form 1040. He also adds $37 to his $1,803 tax balance and enters the $1,840 total on line 69. He files his return on April 16 and includes a check for $1,840. Because he used the annualized income installment method, he must attach Form 2210, including Schedule AI, to his return and check the box on line 1b of Form 2210.

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