Here’s a situation I see constantly with restaurants, landscapers, contractors, and anyone else whose business has a slow season and a busy season.

They owe $60,000 in taxes for the year. The standard rule says: pay $15,000 in April, $15,000 in June, $15,000 in September, and $15,000 in January. Four equal installments, 25% each.

The problem? They made almost nothing in January, February, and March. Maybe $8,000 in net profit. They owe $15,000 to the IRS in April on $8,000 of income. Then they repeat the underpayment in June on another slow quarter. By September — when the real money starts coming in — they’re already behind.

The IRS calls this an underpayment. They’ll assess a penalty. And most business owners just accept it and pay it, because they don’t know there’s another way.

There is.

The Annualized Income Installment Method

It’s called the annualized income installment method, and it’s buried in Form 2210, Schedule AI.

The concept is simple: instead of paying a flat 25% of your annual tax liability each quarter, you pay based on what you actually earned during each payment period. The IRS annualizes your income for each period, computes what you would have owed if you’d earned at that rate all year, and that becomes your required payment.

For a seasonal business, this almost always means lower payments in Q1 and Q2, higher payments in Q3 and Q4. Same total tax at the end of the year — just timed to match when the money actually came in.

How the Math Works

Say you run a landscaping business on Long Island. You’re a sole proprietor or single-member LLC. Here’s your rough income breakdown:

  • Q1 (Jan 1–Mar 31): $12,000 net profit
  • Q2 (Apr 1–May 31): $28,000
  • Q3 (Jun 1–Aug 31): $65,000
  • Q4 (Sep 1–Dec 31): $45,000
  • Total: $150,000 for the year

Your annual federal tax on $150,000 of self-employment income (after the half-SE deduction and standard deduction) is roughly $26,000. Under the standard method, you’d pay $6,500 each quarter.

But in Q1, you only earned $12,000. You had almost no tax liability yet. Under the annualized method, your Q1 payment reflects that — it would be a fraction of $6,500, because you’re being taxed on what you actually earned.

By Q3, when you’re making real money, the required payment catches up. But you’ve had the cash in your pocket during the slow months when you needed it most.

If you run a seasonal business and have been taking underpayment penalties year after year, you may not have to. Book a call and I'll walk you through whether this method makes sense for your situation.

The Catch: You Have to File Form 2210

This doesn’t happen automatically. The IRS won’t figure it out for you.

To use the annualized method, you need to:

  1. Complete Schedule AI attached to Form 2210 — this is where you enter your actual income for each measurement period and the IRS runs the annualization
  2. Check Box C on the front of Form 2210 to indicate you’re using the annualized income installment method
  3. File Form 2210 with your return — if you leave it out, the IRS calculates your penalty using the standard method and charges you accordingly

The deadline question comes up: do you have to know ahead of time that you’re using this method? No. You figure it out at tax time when you’re filing your return. You reconstruct your quarterly income, run the Schedule AI calculation, and if your required installments under the annualized method were less than what you would have paid under the equal-installment method, you’ve reduced or eliminated the penalty.

One thing to keep in mind: this method requires you to have solid records of your income and expenses by quarter. If your books are a mess, it’s hard to run the numbers accurately. Clean quarterly records are your foundation.

New York Has Its Own Version

New York State also has an underpayment penalty, and NY similarly allows an annualized income method for state estimated taxes. For NY, you’d use Form IT-2105.9 (the underpayment form that includes the annualized option) when filing your state return.

New York City income taxes work the same way for city residents. If you’re paying city tax, the same principle applies.

The NY forms are more painful to fill out than the federal ones — that’s just the reality of NY tax administration — but the math works in your favor the same way.

Who This Method Is Actually For

You benefit from the annualized income method if your income is materially uneven across quarters. Not just slightly different — meaningfully concentrated in one or two periods.

Strong candidates:

  • Restaurants — especially summer or seasonal shore destinations; also holiday-heavy retail
  • Landscaping, lawn care, and outdoor contractors — almost no income November through March
  • Construction and renovation — projects cluster in spring and fall; slow winters
  • Retail with a holiday peak — November and December can represent 40-50% of annual revenue
  • Freelancers and consultants with big year-end projects — a single large Q4 contract can throw off the whole year
  • Anyone who sold an asset or recognized a gain late in the year — a September business-asset sale makes the first three quarters look poverty-level by comparison

If your income is roughly equal across all four quarters, the annualized method doesn’t help much. Stick with the standard installments.

The Bigger Picture on Estimated Taxes

Most business owners underpay in at least one quarter every couple of years, either because income was higher than expected or because a big one-time event — a sale, a settlement, a large contract — landed unexpectedly. The penalty for underpayment is currently calculated at the federal short-term rate plus 3%, which runs about 8–9% annualized right now. It’s not catastrophic, but it’s not nothing.

The annualized method is the most powerful tool for reducing that penalty structurally if your income is seasonal. But even if you don’t qualify, there are two other safe harbors worth knowing:

Safe harbor 1: Pay 100% of last year’s tax liability in equal installments (110% if your prior-year AGI was over $150,000). If you hit that number across the four quarters, no underpayment penalty — regardless of what you owe at year-end.

Safe harbor 2: Pay at least 90% of your current-year tax liability in equal installments. Harder to hit if your income varies.

The annualized method is your fallback if you couldn’t hit either safe harbor — your income was just too uneven. It’s not a workaround; it’s exactly what the IRS designed the form to handle.

If you've been paying underpayment penalties and wondering whether there's a better approach, there often is. Schedule a call and let's review your quarterly situation.

Related: The Quarterly Tax Mistake That Quietly Racks Up Penalties · You’re Halfway Through 2026. Here Are 5 Tax Moves to Make Before September. · Estimated Tax Calculator

This post is for general informational purposes and does not constitute legal or tax advice. Tax law and IRS procedures change. The annualized income installment method involves calculations specific to your situation — consult a qualified tax professional or schedule a call with Geiger Tax & Accounting before applying it to your return.