How can yo avoid the estimated tax penalty with strategic tax withholding?
As of April 2025 — The due dates for quarterly estimated tax payments for your 2025 tax year are:
- April 15, 2025
- June 16, 2025
- September 15, 2025
- January 15, 2026
If you miss one of those dates, the IRS imposes a penalty (estimated tax penalty). The current penalty rate for underpaying the first quarter is 7%. But that’s just the starting point. Since the penalty isn’t tax-deductible, the true cost is higher. If you’re in the 37% tax bracket, that 7% penalty effectively costs you 11.11%.
Once the penalty hits in Q1, you can’t erase it with a catch-up payment in January. However, you can often sidestep the penalty with strategic tax withholding. Let’s look at the options.
Estimated Tax Penalty: Safe Harbor Rules
90 Percent Rule
No penalty applies if you pay at least 90% of your total current-year tax liability through timely estimated tax payments. “Timely” means paying no less than 22.5% of your estimated total tax by each of the four deadlines.
100 Percent Rule
If your 2024 AGI was $150,000 or less ($75,000 if married filing separately), you can avoid penalties by paying 100% of your 2024 tax across four equal estimated payments (25% per quarter).
110 Percent Rule
If your prior-year AGI was over $150,000 ($75,000 MFS), you must pay 110% of your 2024 tax liability, spread equally at 27.5% per quarter to avoid penalties.
Withholding Strategies That Work to Avoid Estimated Tax Penalty
Withholding on W-2 wages, bonuses, or IRA distributions counts as estimated payments and—by default—is treated as if paid evenly across all four quarters. But if you document the exact date of withholding, you can apply it specifically to the quarter it occurred.
Bonus Solution
Let’s say you’re short $40,000 in estimated payments. You have your S corp pay a $47,000 bonus in December with $40,000 withheld. That spreads $10,000 into each quarter—problem solved.
But be careful: you and your S corp will also owe 15.3% in payroll taxes, so weigh the full cost.
W-2 Withholding Adjustment
Instead of having $10,000 of W-2 withholding spread evenly over the year, allocate all of it to Q1 if it occurred in the first three months. This gives you $10,000 in each quarter when combined with three $10,000 estimated payments.
IRA Rollover-and-Replace Strategy
In December, you realize you’re short $40,000. You take a $40,000 IRA distribution and request 100% withholding. Then, within 60 days, you redeposit the funds—avoiding tax on the distribution while applying the full $40,000 to withholding.
You can also apply the $40,000 to the actual date withdrawn (e.g., September 10), allowing you to meet quarterly targets precisely.
Key Takeaways to Avoid the Estimated Tax Penalty
- Missing an estimated payment can lead to stiff penalties.
- Withholding is treated as if paid throughout the year—or on exact dates if you document them.
- Smart year-end planning using bonuses, W-2 jobs, or IRA rollovers can help you avoid the penalty—even if you’re catching up at the last minute.
Always consult with your tax advisor before using these strategies. At Ken-Mar Tax, we help you think outside the block and inside the rules.
Contact Us
If you’ve been frustrated dealing with the IRS, or you just don’t want to deal with the IRS, contact Ken Weinberg to explain your situation and find out what Ken-Mar Tax would charge to handle your situation and avoid dealing with the IRS all together.
- If you have back taxes and want to know the timeline and/or costs to get your back taxes resolved
- If you own a small business and want to discuss tax reduction strategies for the self-employed
- If you’re worried your last tax expert wasn’t doing the best they could have and want a second opinion…
Contact Ken Weinberg to learn more about our small business tax consultant services and set up a free consultation by filling out the form on this page.
