NC Refund Overall but TurboTax calculates an underpayment interest penalty

[ninsights]

We live in NC.  We work from NC. My husband's company deducted both IL and NC state taxes from his W2. This was incorrect. All of the state tax deductions should have gone to NC. They cannot fix the W2.
We make quarterly payments in NC since I am self-employed. For the 4th payment, I intentionally overpaid the 4th amount by the amount that was accidentally sent to IL, essentially sending NC the amount they should have received from his W2.

I have filled in a non-resident return for IL to get that tax back. No problem there.

However, in the North Carolina return, it is correctly calculating that we have a small refund overall BUT it's also saying that we have a small "underpayment interest" charge. Is this because NC was underpaid NC taxes throughout the year because of my husband's employer's error or should TurboTax not be calculating an interest penalty since my 4th "estimated taxes" payment more than paid the amount NC should have received that went to Illinois instead? Is the underpayment penalty a result of NC receiving their money later in the year (technically January 2022 for the 4th estimated payment) instead of throughout the year?

[AnnetteB6]

Yes, the North Carolina underpayment interest calculation is initially based solely on withholding amounts. 

However, as you go through the North Carolina return, you should see an option to try to reduce or eliminate the interest penalty based on the fact that you made estimated payments as well.

The following information is taken from the North Carolina instructions for calculating the underpayment penalty:  

Who Must Pay Underpayment Interest.

In general, you may owe underpayment interest if the total of your North Carolina income tax withheld and timely estimated tax payments do not equal at least the smaller of: • 90% of your 2021 tax, or • 100% of your 2020 tax. (Your 2020 tax return must cover a 12-month period)

Exceptions.

You do not have to pay interest on the underpayment of estimated income if any of the following exceptions apply:

• The total tax shown due on your 2021 tax return minus the amount of tax credits and North Carolina tax withheld is less than $1,000. To determine whether the total tax is less than $1,000, complete Part I, Lines 1 through 6.

• You did not have any individual income tax liability for 2020. For purposes of this exception, an individual income tax liability means the amount of tax shown due on the return less any tax credits.

• If you are a farmer or commercial fisherman and your gross income from farming (including oyster farming) or fishing is at least two-thirds of your gross income from all sources for 2020 or 2021 and you file your 2021 North Carolina income tax return (Form D-400) and pay the entire amount of tax shown due by March 1, 2022, you do not owe interest for underpaying estimated tax. Important: If this exception applies, you must enter the letter F in the exception box located next to Line 26e of Form D-400 to avoid receiving an assessment for underpayment of estimated tax.