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Omran1 wrote, I will be receiving a net profits distribution, which will be sizable relative to my income from my day job. This distribution was a complete surprise -- it occurred on Dec 22 -- so I haven't paid any estimated taxes this year. Is there anything I need to do between now and April 15th to avoid any tax penalties?

To which you replied, That depends. Is your 2010 withholding at least as much as your 2009 total tax? If so, no.

OK. That raises a [novice] question about my understanding of the purpose and intent of estimated quarterly tax payments.

It was my understanding that quarterly estimated taxes were only for income earned in the preceding quarter. While it might raise an audit flag, it is supposed to be perfectly reasonable to submit irregular (different sized) payments in the various quarters simply because most business income streams are not smooth.

What's more, it would seem to be unreasonable for the IRS to demand taxes be paid in the preceding 3 quarters if you simply haven't received [or even recognized on your books that you should receive] any payments. Consider the case of a young engineer earning $100K/year at his day job. On the side he's started a little business and has been putting a lot of evening and weekend hours pulling together some great product for the past few years. Then out of the blue he makes some really huge sale in December. Should he be penalized for not anticipating that one big sale? I mean the taxes on that sale might be more than he made in the entire year, so how could he be expected to anticipate it and pre-pay his tax liability?

OK, I think I know the simple answer here: He has to pre-pay at least up to his previous year's tax liability OR at least not under-pay this year's liability. But what if in 2009, he had a huge sale and then it looked like he wasn't going to have any sales this year; but landed another one right at the last minute in December? Should he have been paying estimated taxes based on last year's liability? Or should he be paying quarterly estimated payments as he earns the income as I suspect?

- Joel
And no, this doesn't match my situation; but I do know at least one guy that this kind of thing could happen to...
And yes I am thinking about incorporating and going 1099, so I am interested in stuff like this for my own work as well.
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