Avoid underpayment penalty with quarterly estimated tax payments

Forum|Forum|4 years ago
March 19, 2022
2 replies
7 views

Hi all:

In 2021, I avoided an underpayment tax penalty by withholding "extra cash" during the last few months of the year. In 2022, I was wondering if I can avoid an underpayment tax penalty with quarterly estimated tax payments instead of bumping up my withholdings again.

However, the "safe harbor" requirements in Form 2210 only mention "withholding taxes" (see line 6 in Form 2210). Would my quarterly estimated tax payments also satisfy the safe harbor requirements, and if so, where is this mentioned in the tax code/forms?

Thanks!

Best answer by JohnB5677

That makes sense. I guess my confusion results from the IRS ONLY mentioning withholding taxes in Part I of Form 2210. This makes it sound like withholdings are a way to circumvent timely payments. Here is an example:

I get large lump payments from a publisher in Q1 and Q3 every year. These payments vary. Assume that I pay no estimated tax payments and only pay tax via withholdings from my day job. Now towards the end of the year, I substantially increase my withholdings for two months so that I fall within the safe harbor rules listed in Part I of Form 2210. Could the IRS still assess a late penalty even though I followed exactly what they state in Part I of Form 2210?

You may have found a loophole. Withholdings, as opposed to estimated payments, are allocated across the entire year, and unless you choose to allocate your income quarterly it will be averaged across the year also. Provided you can make up the tax difference with withholding's in the last couple of months it can work.

LeonardS

Level 14

Yes, your quarterly estimated tax payments also satisfy the safe harbor requirements.

"...Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments".

IRS Ref: Estimated Taxes

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enfinityTXAuthor

Level 3

Thanks! So what I take away from this reply is that I could make a large estimated tax payment on Dec 31 that would bring my taxes, for instance, to less than $1,000 for the tax year?

The problem is that Form 2210 states that I should only consider withholding taxes (and "Don't include estimated tax payments"). Am I missing something? Thanks!

JohnB5677

Level 15

That would be too easy, and the IRS has already figured that out.

The Leonard Smith reference from above states:

Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

This means you have to pay quarterly amounts and be on time.

IRS Ref: Estimated Taxes

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