Last-Minute Tax Payment? Increasing Paycheck Withholding (W-4) is Better Than Direct Estimated Tax Payments (1040-ES)

Posted on November 20, 2024 // 4 Comments
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It’s late in the year, and you may have realized that you will owe more income tax than you thought. In order to avoid penalties, you’ll need to send some extra money to the IRS or your state tax collector. Here is the *general* rule to avoid a penalty for underpayment of estimated tax, according to the IRS:

Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

But again, that’s generally. Even if you send it by the end of the year, you may still be on the hook for some penalties because the IRS wants you to pay your taxes evenly throughout the year. For example, technically you’ll need to pay 25% of the tax shown on the return for the prior year for each of the four quarters, adding up to 100% over the entire year. They don’t allow you to pay everything on December 31st.

There are two ways to pay your taxes during the year:

  • Withholding from your pay, your pension or certain government payments, such as Social Security.
  • Making quarterly estimated tax payments during the year.

However, there is a small but potentially important different between the two options. No matter when your withholding is taken out from your paycheck during the year, it is viewed as being paid in evenly. In contrast, any 1040-ES estimated payments are assigned to a specific quarter.

So if you think you’ve underpaid your taxes by enough that penalties may apply, you should consider changing your paycheck withholding to increase your tax payments instead of making a direct payment to the IRS. Many payroll providers will let you adjust things online and you can specifically set the amount of extra withholding for them to take out. Or you may have to submit a W-4 directly to your HR department. This will be step 4(c) on the official W-4 form. Note that this will be the flat amount taken out of each paycheck until you change it back. See top image for reference (source).

Filed Under: Taxes //
Last updated: November 20, 2024
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Comments

  1. CF Frost says
    November 22, 2024 at 12:38 pm

    Jonathan,
    What do you do specifically as it relates to your desire to obtain bank signup bonus’s as well as I’m sure, you’re like the rest of us and earning some really nice returns on idle cash in HYSA’s.

    Last year (while filing for tax year 2023), I, for the FIRST time ever, had to actually PAY taxes. This was due to mainly bank signup bonus’s, HYSA interest, etc. I had to write a check to the IRS for $8,000!

    I use H&R Block to file my software and I was surprised to learn that I may have been required to pay a penalty for not paying quarterly tax payments. For some reason, according to H&R Block, that because I did not have to pay taxes the prior year, I was not going to be charged a penalty. I took it as a warning notice…

    I then tried to figure out what I needed to do for Tax Year 2024 and my planned bank bonus’s and HYSA interest (I’ve also switched cash to Schwab’s SNSXX – to continue to earn high interest on idle cash and to be exempt from State Income taxes).

    I elected to use of the W-4 form to try and figure out how much extra Federal taxes I could pay on my job income – but to be honest, the W-4 form is not the most intuitive to figure out. I’m basically paying an additional $600 ($15k for the year) out of each paycheck, towards Federal Taxes just to make sure I’m not going to owe.

    Some might say I’m giving the Gov’t a free loan…which I don’t really care, I’m making plenty in the way of $$ interest and other bonus’s.

    If I’m lucky, I’ll break even…
    If I’m wrong, I’ll get a BIG FAT refund…
    But, I won’t pay Uncle Sam extra $$ in the form of a Penalty!!

    Reply
    • Jonathan Ping says
      November 22, 2024 at 1:33 pm

      For the most part, I try to make sure I pay 100% of last year’s taxes via estimated quarterly taxes and payroll withholding. As long as you do that, then even if you do have a bigger tax bill the next year, you won’t owe penalties, just the difference in taxes. This can be tricky if your paycheck is variable, and unrealistic if your income dropped a lot, though.

      Reply
      • CF Frost says
        November 23, 2024 at 8:38 am

        Paying Quarterly Taxes to the IRS.

        I’m not even sure how to just pay quarterly taxes to the IRS – I’m sure they’d be happy to just take in any $$ that showed up in their coffers but there has to be a process – hopefully it would be simple with a web-intake form or something??

        Looks Like I have some research to do on how to go about just paying quarterly taxes. When I file me taxes with H&R Block software – there’s places to put amounts, bank account numbers, etc… I don’t even need a stamp or have to go find where we last kept the checkbook (does anyone still write checks anymore??).

        Thanks!

        Reply

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