The Annualized Income Installment Method: Lower Quarterly Payments for Uneven Income

By Tallyvane, independent developer and publisher · Tax year 2026 · Published September 8, 2026 · Written from the documents listed at the end; not tax advice.

The default estimated-tax schedule assumes income arrives evenly: one-quarter of the required annual payment is due on each of four dates. A consultant whose contracts close in the autumn, a seasonal business, a freelancer who started mid-year — for all of them the April and June installments are computed on income that has not been earned yet. Section 6654(d)(2) offers an alternative. The annualized income installment method sets each payment from the income actually earned by the end of its period, scaled up to a full year, and it can cut the early installments substantially. It cannot demand more by any date than the regular schedule would have: a cap ties the annualized installments to the regular ones, with unused room carried forward. The price is Schedule AI — a 36-line schedule filed with the return — and bookkeeping by period during the year.

How the method works

Schedule AI has four columns, one per installment, each covering income from January 1 to the end of a period:

In each column the taxpayer enters adjusted gross income for the period — for a Schedule C filer, the profit earned to date less the deductible half of self-employment tax on it — and multiplies it by the annualization factor (twelve divided by the months in the period) to get the income the year would produce at that pace (lines 1–3). The full-year standard deduction and the QBI deduction on the annualized figures are subtracted (lines 7–11), the income tax is computed on the result (line 14), and self-employment tax is added from Part II (line 15), which annualizes net earnings the same way and applies the Social Security limit prorated to the period. Credits are subtracted (line 18). The result is the tax the year would owe if the period's pace held all year.

The applicable percentage — 22.5%, 45%, 67.5% and 90% — is then applied (lines 20–21). Those are one, two, three and four quarters of the 90% safe-harbor figure: by each date the taxpayer must have paid that share of the annualized tax. Installments already required by earlier columns are subtracted (lines 22–23), and what remains is the column's annualized installment — subject to the cap.

The cap

Lines 24–27 compare the annualized amount with the regular installment: one-quarter of the required annual payment (the smaller of 90% of this year's tax and 100% or 110% of last year's), plus any amount by which earlier columns came in under their regular installments. The installment is the smaller of the two. Two consequences follow. The method never demands more than the regular schedule would have — a filer whose income is front-loaded pays the regular installments and nothing extra. And room not used in an early column carries forward, so a filer who paid less in April because income was slow is not asked to catch up all at once in September; the catch-up is spread by the annualized figures themselves.

A worked 2026 schedule

A single filer, no other income, standard deduction, in a state with no income tax. Profit through the four period ends is $5,000, $15,000, $40,000, $100,000: a slow first half and a strong finish. The year's federal tax is $22,365; with no prior-year figure, the required annual payment is $20,128 and the regular installment $5,032.

In April, $5,000 of profit annualizes to a year of $18,587 of AGI, whose tax is $3,025; 22.5% of that is $681, against a regular installment of $5,032. June asks for $2,247. By the September column the pace has picked up, and the December column, which annualizes the full year at a factor of 1, brings the total to the same $20,128 the regular method requires — the method changes the timing, not the amount. Under the regular schedule, paying the annualized amounts would have left the first two installments $4,351 and $2,785 short and drawn a penalty; under Schedule AI those amounts are exactly what is required, and no penalty arises.

What it demands during the year

The method is applied at filing time on Schedule AI, but it only helps a filer who paid the annualized amounts on the due dates, which means computing them then. Publication 505 provides the same computation as a worksheet for use during the year (Worksheet 2-7). It requires knowing profit to date at each period end — March 31, May 31, August 31 — which in turn requires books kept current to the period, not reconstructed in April. A filer using cash-basis accounting counts income when received and expenses when paid, so the period figures follow the bank account.

Withholding, if any, is credited evenly across the four columns as under the regular method, unless the taxpayer elects actual dates. Estimated payments already made are applied in order to the annualized installments, oldest first, when the penalty is computed in Part III.

Filing

Form 2210 must be filed with the return, with box C in Part II checked and Schedule AI completed, whenever the annualized installments are used to reduce or eliminate the penalty (Form 2210, Part II). Without the schedule, the IRS computes the penalty on the regular installments and bills the difference. Every column has to be completed even if only the first two benefited. Tax software fills the schedule from period-by-period income entries; the arithmetic is mechanical once the four profit figures and any wages by period are known.

A filer who qualifies for the prior-year safe harbor — 100% or 110% of last year's tax spread evenly — usually has no need for the method, since the regular installments are then fixed in January and unaffected by how the current year's income falls. The annualized method matters when last year's tax was high relative to this year's early income, or when there is no prior year to rely on.

State returns

Most states with an income tax offer an annualized method of their own for state estimated payments, on the state's underpayment form, with the state's own periods and percentages. California's Form 5805 uses the federal periods but the FTB's 30/40/0/30 weighting in the regular schedule; New York's IT-2105.9 follows the federal pattern. A filer who annualizes for federal purposes should check whether the state form has to be filed as well.

Documents this guide was written from

• 26 U.S.C. §6654(d)(2) — the annualized income installment: annualizing taxable income, the applicable percentages, and the reduction for earlier installments
• Form 2210 (2025), Schedule AI — lines 1–36: annualization amounts, the standard deduction and QBI deduction lines, the cap in lines 24–27, and Part II's prorated Social Security limits
• Instructions for Form 2210 (2025) — Schedule AI line instructions: AGI for each period includes the deductible part of self-employment tax; net earnings are 92.35% of the period's profit
• IRS Publication 505, Tax Withholding and Estimated Tax — the annualized estimated tax worksheet used during the year (Worksheet 2-7)

Figures in the tables are computed by the same engine as the site's calculators from its 2026 data files; the methodology page lists the rules and their verification status, and the editorial policy says how sources are chosen. Tallyvane is not a CPA, enrolled agent or attorney.

Related

• Quarterly estimated tax calculator
• 2026 due dates and the safe harbor rule
• What happens if you miss a quarterly payment