1. Smith, who is self-employed, figures that to avoid a penalty for 2013 under the estimated tax rules discussed above, he must make estimated tax installments of $6,000. By April 15, 2013, he pays an installment of $1,500. In June, he amends his estimate, showing a tax of $3,000 instead of $6,000. He refigures the installment schedule by dividing $3,000 by 4, which gives a payment rate of $750 for each period. As he paid $1,500 in April, the $750 overpayment covers his June obligation. By September 16, 2013, he pays $750; by January 15, 2014, he pays $750.
2. In August 2013, Jones finds that his estimated 2013 tax liability should be $25,000 rather than his original estimate of $20,000. He paid $5,000 as his April and June installments ($10,000 total). Under the amended schedule, he should have paid $6,250 per period ($25,000÷ 4), $6,250 by April 15 and $6,250 by June 17. Thus, there is a $2,500 underpayment ($12,500 − 10,000) for the first two periods.
To cover the underpayment of $2,500, which carries over to the third payment period (June 1 through August 31), Jones’s installment by September 16 must be at least $8,750 ($6,250 + $2,500). If less than $8,750 is paid, there will be an underpayment for the third payment period, as payments in that period are applied first to the carried-over underpayment of $2,500. If at least $8,750 is paid by September 16, there is no third period underpayment to be carried over, so the required installment for the fourth period (September 1 through December 31), due by January 15, 2014, will be $6,250. Unless an exception (27.1) applies, the underpayments for the first two periods will be subject to a penalty.