Image: Moneybestpal.com |

### The annualized income installment method (AIIM) is a way of calculating how much tax you need to pay each quarter if your income is not steady throughout the year.Â

For instance, if you work seasonally or as a freelancer, you can make more money in some months than others. Due to this, estimating your taxes and avoiding underpayment penalties may be challenging.

Depending on how your revenue changes during the year, you can annualize it using one of three possible methods. On Form 8842, you can decide the schedule that most closely matches your revenue pattern. The schedules are:

The applicable percentages that you use to calculate the required installments are:

For example, let's say you choose the standard schedule and your taxable income for each quarter is:

You multiply your revenue by 12 and divide it by the number of months in each period to annualize it. The result of multiplying $10,000 by 12 and dividing the result by three is $40,000. You calculate $50,000 for Q2 by multiplying $25,000 ($10,000 + $15,000) by 12 and dividing by 6. You divide $45,000 ($10,000 + $15,000 + $20,000) by 9 and multiply the result by 12 to get $60,000. In order to get $70,000 for Q4, you multiply $70,000 ($10,000 + $15,000 + $20,000 + $25,000) by 12 and divide by 12.

The necessary installments are then obtained by applying the relevant percentages. Hence, to get $10,000 for Q1, multiply $40,000 by 25%. You multiply $50,000 by 50% for Q2, giving you $25,000 as the result. You multiply $60,000 for Q3 by 75% to get $45,000. You get $70,000 after multiplying $70,000 by 100% for Q4.

You must pay $150,000 in taxes for the entire year ($10,000 plus $25,000 plus $45,000 plus 70,000). This is equivalent to paying $17,500 per quarter, or 25% of your gross income. Using the AIIM, however, enables you to pay more tax when your income is higher and less tax when your income is lower. This can assist you in avoiding underpayment penalties and cash flow issues.

The AIIM is not mandatory and you can still use the regular installment method if you prefer. However, employing the AIIM may be advantageous for you if your income varies greatly during the year or if you anticipate making more than 90% of your income in the final quarter of the year (for instance, if you receive a sizable bonus).

The AIIM enables you to modify your quarterly tax payments in accordance with your real revenue for each period. You achieve this by annualizing your revenue, which entails multiplying it by a number that corresponds to the number of months in a year. The required installment for each quarter is then calculated by adding a certain percentage to the annualized income.

- 3-3-6-9 (Standard): You annualize your income for the first 3 months, then for the first 6 months, then for the first 9 months, and then for the whole year.
- 2-4-7-10 (Option 1): You annualize your income for the first 2 months, then for the first 6 months, then for the first 10 months, and then for the whole year.
- 3-8-5-11 (Option 2): You annualize your income for the first 3 months, then for the first 11 months, then for the last 5 months, and then for the whole year.

The applicable percentages that you use to calculate the required installments are:

- Q1: 25%
- Q2: 50%
- Q3: 75%
- Q4: 100%

For example, let's say you choose the standard schedule and your taxable income for each quarter is:

- Q1: $10,000
- Q2: $15,000
- Q3: $20,000
- Q4: $25,000

You multiply your revenue by 12 and divide it by the number of months in each period to annualize it. The result of multiplying $10,000 by 12 and dividing the result by three is $40,000. You calculate $50,000 for Q2 by multiplying $25,000 ($10,000 + $15,000) by 12 and dividing by 6. You divide $45,000 ($10,000 + $15,000 + $20,000) by 9 and multiply the result by 12 to get $60,000. In order to get $70,000 for Q4, you multiply $70,000 ($10,000 + $15,000 + $20,000 + $25,000) by 12 and divide by 12.

The necessary installments are then obtained by applying the relevant percentages. Hence, to get $10,000 for Q1, multiply $40,000 by 25%. You multiply $50,000 by 50% for Q2, giving you $25,000 as the result. You multiply $60,000 for Q3 by 75% to get $45,000. You get $70,000 after multiplying $70,000 by 100% for Q4.

You must pay $150,000 in taxes for the entire year ($10,000 plus $25,000 plus $45,000 plus 70,000). This is equivalent to paying $17,500 per quarter, or 25% of your gross income. Using the AIIM, however, enables you to pay more tax when your income is higher and less tax when your income is lower. This can assist you in avoiding underpayment penalties and cash flow issues.

The AIIM is not mandatory and you can still use the regular installment method if you prefer. However, employing the AIIM may be advantageous for you if your income varies greatly during the year or if you anticipate making more than 90% of your income in the final quarter of the year (for instance, if you receive a sizable bonus).

You must complete Form 2210 Schedule AI and attach it to your tax return in order to use the AIIM. You must also keep track of your earnings and outgoings for every time period.