The Internal Revenue Service Form 2210 is used to calculate and report an underpayment of estimated taxes paid. Estimated taxes are typically made by the self-employed who do not have withholding taken out of their pay and must file a quarterly return and pay a quarterly amount based on what they paid in taxes in the previous year. Form 2210 contains many special rules and allowances for the payment of the penalties, depending on the circumstances a taxpayer may find herself in. The penalties may be abated (forgiven), unchanged or increased, so the IRS will calculate these penalties.
Calculating the Required Annual Payment
Take your prior-year 1040 form and find line 55. It is on the second page about half of the way down. Line 55 is the amount of the tax on your taxable income after certain tax credits have been subtracted. These credits include those for payment of foreign tax, child- or dependent-care expenses, education credits, retirement savings and the child tax credit. Enter this amount in box 1 of the Form 2210.
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Add other taxes from the prior year's Form 1040. These would include self-employment taxes, uncollected Social Security and Medicare taxes, excise taxes and "look-back" interest. You may also have to include any household employment taxes (for employees who work in your home) if you had federal income taxes withheld from your pay and would have had to file Form 2210 without them.
Enter all refundable tax credits as a negative number in box 3 of Form 2210. These would include the the earned income credit, additional child tax credit, education credit and the first-time homebuyer tax credit. Any other refundable tax credit will be added here as a negative number.
Subtract credits in box 3 from the taxes in boxes 1 and 2. The total goes into box 4. If the total is less than $1,000, you will not owe a penalty and do not need to file the Form 2210.
Multiply answer in box 4 by 0.90 or 90 percent. Put that answer in box 5. Using the amounts of taxes withheld in the prior year, found on lines 61 and 69 of the prior year's Form 1040, enter these totals in box 6 and subtract the total in box 6 from the total in box 4. Place this answer in box 7.
Calculate the maximum required annual payment amount using one of the three methods for doing so. In box 9, enter the smaller of boxes 5 or 8. If box 9 is more than box 6, you may owe a penalty.
Part 2 of the 2210 form is the Reasons for Filing. Read through those and see which applies to you. If none of them does, you will not need to file this form.
Choosing the Calculation Method
Read through each method to determine which applies to your situation. The methods are the short method, the regular method and the annualized income installment method.
Use the short method if the following applies to you: You made no estimated tax payments for the current tax year, or your payments made were withheld federal income tax. Or, if you paid the same amounts in each of the four payment due dates. The short method consists of calculating 90 percent of the taxes owed from the prior year and subtracting any estimated tax payments made in the current year. The penalty is calculated by multiplying the total underpayment by 0.02200. Then the total underpayment is multiplied by the number of days prior to April 15 of the current tax year and by 0.00008. Subtracting the result in box 16 from box 15 gives you the penalty owed.
Use the regular method if any estimated payments were made late, or your income varied during the year and the penalty can be reduced or eliminated using the annualized income installment method. It's possible, too, that if you are filing a 1040NR tax form for non-residents, you will need to use the regular method.
Figure the penalty using Part Four of the 2210. The main difference in the calculations for the regular method is the use of columns reflecting any estimated taxes that have been paid and the dividing of the taxes paid into four equal parts, reflecting the quarterly payments made.
Choose the annualized income method if you either operated a business on a seasonal basis or had a large capital gain late in the tax year. The worksheet for calculating the penalties owed using the AI method is on page four of the Form 2210. Like the regular method, it is divided into the quarters of the tax year. This worksheet, too, uses the information in the first nine boxes of the Form 2210 to calculate taxes owed and penalties.
Things You'll Need
Form 2210 instructions
Prior-year Form 1040