For example, if you owed $10,000 in tax in 2020 and $20,000 in tax in 2021, your March and June 2022 payments would be $2,500 each and your September and December 2022 payments would be $7,500 and $7,500, or $20,000 in total, as the net tax due from the previous year.
The previous year option is based on paying one quarter of your net tax due from the previous year for each of the four payments. So $5,000 for March, June, September and December, assuming $20,000 was owed the previous year.
The current year option may be preferable if your income is lower this year than the previous two years. Sometimes you have a temporary increase in your income due to an extraordinary event that may not apply this year. If this is the case and you expect to owe less tax, or pay nothing, you can pay less or even pay nothing at all.
Farmers and fishermen do not pay quarterly installments. They make a payment on December 31.
Why do you receive a notification to pay tax in installments
It looks like you didn’t pay enough installments in 2021, Robert, so you made a late payment for 2021 in February 2022. If you owe tax and you underpaid your installments , you may owe interest or penalties. If you have not made your payments on time using one of the three installment payment options, you will be charged interest on the installment payments.
The calculation of interest on installments is based on the calculation of the payment that incurs the least interest (no calculation, previous year or current year). If your installment interest is less than $25, you won’t be charged interest, Robert. If it is over $1,000, you will be charged a penalty of 25% installment interest in addition to the interest.
What happens if you are late paying, underpaying or overpaying your installment payment
If you pay a quarterly payment late, or if you pay less, you can reduce your interest charges or penalty by overpaying later or by making another payment sooner. For example, if you make your March payment three months later in June, you can make your December payment three months earlier in September to earn interest on the payments, which reduces interest charges.
Installments are applied against your tax owing on your tax return, just like tax withheld from other sources of income. If you overpay your installments, you will receive a refund when you file your tax return. It is common for self-employed taxpayers and retirees to pay quarterly installments, as well as those with significant investment or rental income.