Avoid underpayment penalty with quarterly estimated tax payments

[enfinityTX]

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!

[LeonardS]

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

[enfinityTX]

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]

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

[enfinityTX]

Thanks! This is helpful. My initial question was whether the estimated quarterly tax payments can be used to satisfy the “safe haven” criteria that the IRS lists in Form 2210 (and that the media and others often bring up when it comes to avoiding underpayment penalties).

I guess the answer to this question is clearly “no” then? In other words, the “safe have” rule stating that you don’t pay underpayment tax penalties if you paid at least 100% of the prior years taxes (or owe less than 90% or $1000 in current year taxes) only considers withholdings. Is this correct?

Thanks!

[DianeW777]

Withholding is not the only consideration. However if estimated payments were not paid on time (April, June, September and January), then there can be a shortfall in any one of the quarters which will create the underpayment penalty.  This can occur even if you have a refund and even if you, in total, meet the 100% or 110% depending on income (prior year tax liability) or 90% of the current year tax or $1,000 total tax due.

The IRS system is 'pay as you go' meaning when the taxable income occurs, they want the tax at that time and not at the end of the year.

[enfinityTX]

Thanks, Diana! So how would I use the estimated payments to satisfy the safe haven requirements? My takeaway from this thread is that it cannot be done.

I, of course, assume that the purpose of the safe-haven criteria is to give taxpayers simple rules ($1000, 90%, or 100% (110%)). If I have to consider the timing of tax payments, it is no longer simple...

[JohnB5677]

You can satisfy the safe harbor criteria by making timely equal estimated payments that would ensure that you paid 110% of your 2021 taxes. As 

DianeW777 said this would be by the 15th of the month in April, June, September, and January 2023.  If your late, or skip payments you may end up with a penalty.

[enfinityTX]

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?

[JohnB5677 · Accepted solution]

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.

[enfinityTX]

I appreciate the responses. This is helpful. I read the instructions for form "1040-ES Estimated Tax for Individuals" and the IRS at various places says "in most cases" making sufficient withholdings (even if untimely) will be sufficient to avoid a tax penalty.  Does anyone see a scenario where withholdings would still result in a penalty?  I'm unsure due to the use of the langue "in most cases".  Again, thanks for the input!

[ThomasM125]

If the withholdings were less than the required quarterly tax payment then you could still get a penalty for late payment of tax.

[enfinityTX]

Thanks, Thomas! Withholdings are evenly distributed across quarters so technically the so distributed withholdings could fall short of what the quarterly payments should be. I'm with you here.

Yet, page 1 of Form 2210 explicitly states that "you don't owe a penalty" when your withholdings satisfy the safe harbor criteria (110% of last year's taxes; 90% of current year taxes; less than 1,000 taxes owed). Will the IRS impose a penalty (as you suggested and I agree they could) even if the language on Form 2210 suggests no penalty will be imposed if the safe harbor criteria are satisfied?

[DawnC]

They certainly could; timing is everything.    The safe harbor will work for your W-2 income, but if you had high business income in Q1 and did not pay the estimated taxes until Q4, you will likely be penalized for underpayment of taxes.   If you meet one of the exceptions, they will waive it.    You can generate estimated taxes for next year in TurboTax by following these instructions.    There is also an IRS link below.   

Underpayment of Estimated Tax by Individuals Penalty

''We (the IRS) calculate the amount of the Underpayment of Estimated Tax by Individuals Penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits.

We calculate the penalty based on:

• The amount of the underpayment
• The period when the underpayment was due and underpaid
• The interest rate for underpayments that we publish quarterly

Pay a Penalty

Send us a payment or pay your estimated taxes in full on time to stop future penalties and interest from adding up.   

[Robert West]

I need quarterly tax estimate and payment forms. Where are they so I can print them?