What to do about quarterly taxes when you have no idea what you'll make

Hey there y'all! I hope everyone is doing well today.

I want to talk about the version of the quarterly tax problem that actually keeps people stuck...not the "what are estimated taxes" version, but the one where you already know what they are and you still can't do anything about it, because you genuinely do not know what this year is going to look like.

You had a monster second quarter and a first quarter that barely covered rent. Or your whole year happens in four months. Or you landed one big client and you have no idea if they'll still be around come November. Every piece of advice you read says to divide your expected annual tax by four... and you want to ask all of those people what exactly you're supposed to divide.

I've been asked this a lot, and I get a little better at explaining it every time (at least I hope so). So here's this round's attempt.

Here's the reassuring part, and it's more reassuring than most people expect. The tax code already knows income is lumpy. There are several different ways to handle this, they're all legitimate, and you get to pick the one that fits how your money actually arrives.

You are not required to predict the future. That's just the default method.

Everything else is picking a different one.

So here's where we're headed. First the one that removes the guessing entirely, which is where most people should start and stop. Then the one for genuinely seasonal income, which takes more paperwork but is exactly right for some of you. And then the thing nobody tells you about what the penalty actually is, which changes how you should feel about all of this. Give me five more minutes and I think this stops being stressful.

One: stop predicting, use last year

The single most useful rule in this whole area is that you can generally sidestep the underpayment penalty by paying in what you owed last year, regardless of how this year turns out.

Specifically, you're generally protected if you pay in at least 90 percent of this year's tax, or 100 percent of last year's tax, whichever is smaller. If your adjusted gross income last year was over $150,000, that second number becomes 110 percent. And if you'd owe less than $1,000 after withholding and credits, there's no penalty regardless.

Look at what that does for you. Last year's number is a fact. It's printed on a form, in a folder, in your house. You don't have to forecast anything, you don't have to guess whether Q4 will be good, you just have to cover a number that already exists.

So the whole method is: pull last year's return, find the total tax line, multiply by 1.0 or by 1.1 if you were over that AGI threshold, divide by four, and pay that on the fifteenth of April, June, September, and January. For 2026 those all land on weekdays - April 15 is a Wednesday, June 15 is a Monday, September 15 is a Tuesday, and January 15 of next year is a Friday.

If you have a huge year, you'll owe the rest in April, but you won't owe a penalty on top of it. If you have a terrible year, you overpaid and you get it back.

That's it. That's the answer for most people reading this...and you could honestly stop here.

Two: when your income genuinely is seasonal

Now, the safe harbor has one weakness. If last year was enormous and this year is going to be small, paying in 100 or 110 percent of last year means handing the government a pile of money you'll be waiting to get back.

That's what the annualized income installment method is for.

The idea is straightforward even though the form isn't...not even a little. Instead of paying four equal amounts, you calculate what you actually earned in each period and pay based on that. Slow spring, small spring payment. Enormous fall, larger fall payment. It matches your payments to your actual income as it happens.

The catch is real: it lives on Form 2210, Schedule AI, and it is genuinely tedious. It also means you need decent bookkeeping throughout the year, because you have to know what each period actually produced.

Who it's right for: wedding photographers, tax preparers, anybody whose year has a clear season, and anybody coming off an unusually big year into a normal one. Who it's not right for: anybody whose income is merely uncertain rather than genuinely seasonal. Uncertain is what the safe harbor is for.

Three: what the penalty actually is

Here's the piece that reframes this whole topic, and almost nobody knows it.

The underpayment penalty is not a fine. It's interest.

It's set quarterly at the federal short-term rate plus three percentage points, and it compounds daily. For 2026 it's been running at 6 to 7 percent depending on the quarter.

That's worth knowing for two reasons.

The first is emotional, and I don't mean that dismissively. People avoid this whole subject because they picture a punishment - some flat penalty that means they did something wrong. It isn't that. If you underpaid by $4,000 for part of a year, you're looking at interest on $4,000 for that stretch of time...not a fine of $4,000. The number is usually much smaller than the dread attached to it.

The second is practical. Because it's interest at a known rate, it becomes something you can actually reason about instead of just fear. There are situations where a business owner looks at that rate honestly against what the cash is doing in the business and makes a deliberate choice. I'd want to walk through that one with you before you did it, because it only works if the April cash actually shows up - if it doesn't, you stack failure-to-pay penalties on top and the math turns bad fast.

But the point stands. Knowing it's interest turns a scary unknown into a line item.

And one last thing that pairs with all of this: if any part of your income runs through a W-2, withholding gets treated as paid evenly across the whole year no matter when it actually came out. So a late-year withholding bump can retroactively patch an earlier shortfall in a way an estimated payment simply cannot. If you have a W-2 anywhere in your picture, that's your repair kit.

What to do this week

Pull last year's return, find the total tax line, and divide it by four.

That number is a defensible quarterly payment that puts you inside the safe harbor, and you didn't have to predict a single thing to get it.

If this is the version that finally made it click, I'd love to hear it. And if your situation is the seasonal kind where the safe harbor is going to cost you cash you need, that's worth an actual conversation - there's a better answer for you and it's not something to guess at.

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This is education, not advice, and reading it doesn't make you a client. And if you already are a client - this kind of general writing sits outside our engagement. Your engagement covers your return, your books, your situation. This covers everybody's, which means it can't really cover yours. So before you act on any of it, reach out and let's talk about your actual numbers. That's what the individual advice is for. Information current as of August 2026.

Where I'm getting this: IRS Topic 306, Underpayment of Estimated Tax · IRS Publication 505, Tax Withholding and Estimated Tax · IRS, Quarterly Interest Rates · IRS Form 2210 and Schedule AI · IRS, Estimated Taxes FAQ · 26 U.S.C. §6654, §6621

Varde Financial, LLC · Abel Scott, EA · vardefi.com