Which method is commonly used to estimate quarterly tax payments?

The method commonly used to estimate quarterly tax payments is the prior year's tax liability method. This approach allows taxpayers to base their quarterly estimated payments on what they owed in the previous year, adjusted for any changes in income or tax rates for the current year.

This method is especially beneficial for those whose income does not vary significantly year to year, as it provides a straightforward method for calculating estimated payments without the need to project income and deductions in great detail. To qualify for this method, taxpayers must have filed a tax return for the previous tax year and must have had a tax liability.

Utilizing the prior year's tax liability ensures that taxpayers are compliant with the IRS requirements regarding estimated tax payments, which typically require individuals to pay at least 90% of their current year's tax liability or 100% (or 110% for higher-income taxpayers) of the previous year's tax to avoid underpayment penalties. This method simplifies the estimations while ensuring a fair payment structure based on actual tax liability from the previous year.