Yes, you must factor in the $1,700 penalty yourself by adding the $1,700 to the Total tax liability after credits determined by the estimator. Divide $1,700 by the number of pay periods remaining in the year and add the result to whatever the IRS Tax Estimator determines for the Extra withholding that needs to be shown on line 4(c) of the Form W-4 that you will be submitting.
Also make sure that in the Other Source of Income and Payment section of the estimator you have included the $17,000 of income from the 401(k) and the $3,400 of taxes withheld from that payment so that it's included in the estimator's calculation of your AGI, ordinary income tax and tax withholding already paid.
