Missing a quarterly estimated tax payment deadline can be expensive. With the IRS charging a 7 percent penalty for underpayments—and these penalties being non-deductible—the effective cost can feel more like 11 percent for many taxpayers.
Fortunately, there’s a lesser-known strategy that can help you avoid or eliminate these penalties, even if you realize you’re behind on payments late in the tax year.
The Withholding Advantage
The key difference lies in how the IRS treats various types of tax payments:
- Estimated tax payments must be made by specific quarterly deadlines (April 15, June 16, September 15, and January 15)
- Tax withholding from wages or retirement distributions is treated as if paid evenly throughout the year—regardless of when the withholding actually occurs
This timing difference creates a strategic opportunity for taxpayers facing potential underpayment penalties.
Three Effective Strategies
If you find yourself behind on estimated payments, consider these approaches:
- Year-end corporate bonus: Have your S or C corporation pay you a bonus with substantial tax withholding. Remember this may trigger additional payroll taxes.
- Adjust W-2 withholding: If you have traditional employment, increase your withholding for remaining paychecks. You can document the timing to allocate these payments to specific quarters if needed.
- IRA “rollover and replace”: Take a distribution from your IRA and elect to have taxes withheld (up to 100%). Then redeposit the funds within 60 days to avoid taxes on the withdrawal itself while still getting credit for the withholding.
Meeting Safe Harbor Requirements
These withholding strategies can help you satisfy IRS safe harbor rules, which typically require you to pay at least:
- 90% of current year tax, or
- 100% of last year’s tax (110% for higher-income taxpayers)
By understanding and leveraging these withholding options, you can potentially save yourself from costly penalties—even when you’ve fallen behind on traditional estimated payments.
Not sure where to start? We’re here to help-reach out today.