Short Method for Figuring the Penalty

You may be able to use the short method in Part III of Form 2210 to figure your penalty for underpayment of estimated tax. If you qualify to use this method, it will result in the same penalty amount as the regular method. However, either the annualized income installment method or the actual withholding method, explained later, may result in a lower penalty.

You can use the short method only if you meet one of the following requirements.

1. You made no estimated tax payments for 2001 (it does not matter whether you had income tax withholding); or
2. You paid estimated tax in four equal amounts on the due dates.

Note.   If any payment was made earlier than the due date, you can use the short method, but using it may cause you to pay a larger penalty than using the regular method. If the payment was only a few days early, the difference is likely to be small.

If you do not meet either requirement, figure your penalty using the regular method in Part IV, Form 2210.

You cannot use the short method if any of the following applies.

1. You made any estimated tax payments late.
2. You checked the box on line 1b or 1c in Part I of Form 2210.
3. You are filing Form 1040NR or 1040NR-EZ and you did not receive wages as an employee subject to U.S. income tax withholding.

Note.   If you use the short method, you cannot use the annualized income installment method to figure your underpayment for each payment period. Also, you cannot use your actual withholding during each period to figure your payments for each period. These methods, which may give you a smaller penalty amount, are explained later under Figuring Your Underpayment.

Completing Part III.   Complete Part III following the line-by-line instructions.

First, figure your total underpayment for the year (line 18) by subtracting the total of your withholding and estimated tax payments (line 17) from your required annual payment (Part II, line 14). Then figure the penalty you would owe if the underpayment remained unpaid up to April 15, 2002. This amount (line 19) is the maximum estimated tax penalty on your underpayment.

Next, figure any part of the maximum penalty you do not owe (line 20) because your underpayment was paid before the due date of your return. For example, if you filed your 2001 return and paid the tax balance on April 3, 2002, you do not owe the penalty for the 12-day period from April 4 through April 15. Therefore, you would figure the amount to enter on line 20 using 12 days.

Finally, subtract from the maximum penalty amount (line 19) any part you do not owe (line 20). The result (line 21) is the penalty you owe. Enter that amount on line 71 of Form 1040 or line 46 of Form 1040A. Attach Form 2210 to your return only if you checked one of the boxes in Part I.

Example 4.5.   The facts are the same as in Example 4.4. Ivy paid her estimated tax payments in four installments of $1,700 ($6,800 ÷ 4) each on the dates they were due.

Ivy qualifies to use the short method to figure her estimated tax penalty. Using the annualized income installment method or actual withholding will not give her a smaller penalty amount because her income and withholding were distributed evenly throughout the year. Therefore, she figures her penalty in Part III of Form 2210 and leaves Part IV (not shown) blank.

Ivy figures her $1,500 total underpayment for the year (line 18) by subtracting the total of her withholding and estimated tax payments ($8,400) from her $9,900 required annual payment (Part II, line 14). The maximum penalty on her underpayment (line 19) is $66 ($1,500 × .04397).

Ivy plans to file her return and pay her $2,600 tax balance on March 16, 2002, 30 days before April 15. Therefore, she does not owe part of the maximum penalty amount. The part she does not owe (line 20) is figured as follows.

$1,500 × 30 × .00016 = $7

Ivy subtracts the $7 from the $66 maximum penalty and enters the result, $59, on line 21 and on line 71 of her Form 1040. She adds $59 to her $2,600 tax balance and enters the result, $2,659 on line 70 of her Form 1040. Ivy files her return on March 16 and attaches a check for $2,659. Because Ivy did not check any of the boxes in Part I, she does not attach Form 2210 to her tax return.

Ivy's filled-in Form 2210, Part III is shown at the end of this chapter.

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 25 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 59, plus any excess social security or railroad retirement tax withholding on line 62. If you file Form 1040A, your withholding is the amount on line 37, plus any excess social security or railroad retirement tax withholding included in the total on line 41.

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.

Instructions. First, find the number for the payment due date. Then, find the number for the date the payment was made. Finally, subtract the payment due date number from the payment due date number. The result is the number of days the payment is late.

Example. The payment due date is June 15 (61). The payment was made on November 4 (203). The payment is 142 days late (203-61).

Table 4-1. Calendar to Determine the Number of Days a Payment is Late

Tax Year 2001
Day of	2001	2001	2001	2001	2001	2001	2001	2001	2001	2002	2002	2002	2002
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

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 2001 total tax (Form 1040, line 58) is $7,031, the total of his $4,685 income tax and $2,346 self-employment tax. (His 2000 AGI was less than $150,000.) He does not owe any other taxes or claim any credits other than for withholding. His 2000 tax was $6,116.

Ben's employer withheld $3,228 income tax during 2001. Ben made no estimated tax payment for either the first or second period, but he paid $1,000 each on September 2, 2001, and January 12, 2002, 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 2001 tax ($6,328), and was also less than his 2000 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, 2002.

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. Part IV, Section A, of Ben's Form 2210 is shown at the end of this chapter.

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 2001 were $21,000 ($1,750 a month). His net earnings from a business he 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 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 26. He then fills out the rest of Part II.

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

1st Column - 1/1/01 to 3/31/01:
$1,750 per month × 3 months			$5,250
2nd Column - 1/1/01 to 5/31/01: $1,750 per month × 5 months
Plus:	Self-employment income through 5/31/01		4,600
Less:	Self-employment tax deduction ($1,560 ÷ 4.8)		(325)
			$13,025
3rd Column - 1/1/01 to 8/31/01: $1,750 per month × 8 months
Plus:	Self-employment income through 8/31/01		8,600
Less:	Self-employment tax deduction ($1,822 ÷ 3)		(607)
			$21,993
4th Column - 1/1/01 to 12/31/01:
$1,750 per month × 12 months			$21,000
Plus:	Self-employment income through 12/31/01		16,600
Less:	Self-employment tax deduction ($2,346 ÷ 2)		(1,173)
			$36,427

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.

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