Estimated tax and W2 withholding increase question

[manbeing]

I sold my investment property in August 2020, and I didn't pay the estimated tax but increased my employer W2 federal tax withholding so that the tax I will totally pay in 2020 will be 110% of the taxes I paid last year. I know I won't pay the penalty because of estimated tax safe harbor, but I do have two questions that I cannot find the answers online:

1. In my case, do I still have to pay the interests for the months prior to August? My understanding is IRS averages the total taxes I pay in a year.

2. What is the difference between 'increasing the W2 withholding' and 'paying estimated tax in the 4th quarter"?  These two approaches both can help me pay 110% tax of last year to take advantage of safe harbor for 2020 tax year. I assume IRS just checks the entire tax you pay in 2020 and wouldn't differentiate the paid taxes are from withholding or estimated tax payment?

[Critter-3]

1. In my case, do I still have to pay the interests for the months prior to August? My understanding is IRS averages the total taxes I pay in a year.     There is no penalty and if you pay the balance due by 4/15/21 there is no interest either.

2. What is the difference between 'increasing the W2 withholding' and 'paying estimated tax in the 4th quarter"?  These two approaches both can help me pay 110% tax of last year to take advantage of safe harbor for 2020 tax year. I assume IRS just checks the entire tax you pay in 2020 and wouldn't differentiate the paid taxes are from withholding or estimated tax payment?    There is no difference to the IRS ... both ways pays the taxes in advance it is just where the payment comes from.  To you the difference is in the fact you don't need to bother with the form 2210 AI at the end of the year since you are using the safe harbor method to pay the taxes in advance.  

[Critter-3]

1. In my case, do I still have to pay the interests for the months prior to August? My understanding is IRS averages the total taxes I pay in a year.     There is no penalty and if you pay the balance due by 4/15/21 there is no interest either.

2. What is the difference between 'increasing the W2 withholding' and 'paying estimated tax in the 4th quarter"?  These two approaches both can help me pay 110% tax of last year to take advantage of safe harbor for 2020 tax year. I assume IRS just checks the entire tax you pay in 2020 and wouldn't differentiate the paid taxes are from withholding or estimated tax payment?    There is no difference to the IRS ... both ways pays the taxes in advance it is just where the payment comes from.  To you the difference is in the fact you don't need to bother with the form 2210 AI at the end of the year since you are using the safe harbor method to pay the taxes in advance.  

[dmertz]

There is indeed a difference between increasing withholding and paying estimated taxes.  By default, withholding is treated as having been received in equal parts throughout the year, which means that withholding late in the year can make up for underpayment earlier in the year.  By contrast, estimated tax payments only apply when they are actually made and cannot make up for underpayment earlier in the year.  Except for the inconvenience of making the change and later changing it back, increasing withholding during the year is almost always better than just paying estimated taxes.