If you’re a business owner or self-employed professional making quarterly estimated tax payments, you already know that staying on top of those deadlines is important. But let’s be honest, it’s easy to miss one. Life gets busy. Cash flow fluctuates. Maybe you just forgot.
Unfortunately, the IRS isn’t so forgiving. Missing an estimated payment or not paying enough can result in some pretty steep penalties. As of now, the IRS charges a 7% penalty for underpaid taxes. And since penalties aren’t tax-deductible, the actual financial hit can feel even bigger closer to 11% when all is said and done.
But here’s the good news: you may still have options, even if you’re behind.
Thanks to some quirks in how the IRS handles withholding, it’s possible to fix or reduce those penalties without scrambling to make up quarterly payments. Let’s dive into how it works.
Estimated Tax Payments vs. Withholding: What’s the Difference?
Estimated tax payments are due on very specific dates throughout the year:
- April 15
- June 17 (June 15 falls on a weekend in 2025)
- September 15
- January 15 (of the following year)
If you miss those dates, the clock starts ticking on penalties and interest.
But withholding whether from a paycheck, retirement distribution, or other source is treated differently. The IRS considers withheld taxes as being paid evenly across all four quarters, no matter when they’re actually withheld (or, alternatively, on the specific date withheld your choice).
That flexibility opens the door to some clever planning.
How Withholding Can Help You Avoid Penalties — Even Late in the Year
Let’s say you realize in November that you’ve underpaid your taxes for the year. Instead of being stuck with penalties, you can still make a move that looks like you were making timely payments all along.
Here are a few strategies that might help:
✅ 1. Have Your Business Issue a Year-End Bonus
If you own an S corp or C corp, consider paying yourself a bonus before the end of the year and have additional federal taxes withheld. The IRS will treat that withholding as if it had been paid throughout the year (unless you specify otherwise).
Just be aware that bonuses are subject to payroll taxes, so factor those costs into your decision.
✅ 2. Adjust Withholding From a W-2 Job
If you or your spouse have a W-2 job, it’s usually simple to increase withholding temporarily. A single paycheck with a large withholding amount can help you close the gap and meet safe harbor rules.
Be sure to keep track of the timing, especially if you want to assign the withholding to a specific quarter.
✅ 3. Use an IRA “Rollover and Replace” Strategy
This one’s a bit more advanced but can be incredibly effective. If you have a traditional IRA, you can take a distribution, have 100% of it withheld for taxes, and then redeposit the full amount back into the IRA within 60 days.
This effectively lets you “pay” the IRS with a lump sum even if it’s late in the year without triggering taxes on the withdrawal, as long as it’s replaced in time.
(As always, check with your advisor to make sure you’re following all the rules correctly.)
Why This Matters
The IRS has what’s called a “safe harbor” rule: if you pay at least 90% of your current year’s tax bill or 100% of the previous year’s bill (110% for higher earners), you can usually avoid underpayment penalties.
That’s where these withholding strategies can be a lifesaver. They allow you to meet that safe harbor requirement even if you’ve fallen behind on estimated payments. And in many cases, they’re easier to implement than trying to juggle quarterly deadlines all year long.
Let’s Talk It Through — Before the Year Ends
Withholding strategies can be a powerful tool, but the key is timing. Once the year is over, many of these options disappear. So if you think you might be at risk of underpaying taxes or if you just want peace of mind, it’s a smart idea to review your situation now.
Every business is different, and the right move depends on your income sources, business structure, and timing.
If you’d like to chat about how these strategies could work for you, give me a call at 480 355-1398 . Let’s make sure you’re in the best possible position before the year wraps up.