If you’re self-employed or making quarterly tax payments, you may be paying more than you have to.

The IRS charges penalties for underpaid estimated taxes—and those penalties aren’t tax-deductible. That means you could end up paying closer to 11% in effective cost when factoring in lost deductions. But here’s the good news: with smart timing and strategic withholding, you can avoid or reduce penalties—even if you’re behind.

At Polaris Tax & Accounting, we help high-income earners, business owners, and investors use every legal strategy to stay in control of their tax liability. Here’s how withholding works differently from quarterly payments—and how to use it to your advantage.

What Is the Estimated Tax Penalty?

If you underpay your taxes during the year, the IRS applies a penalty based on how much you owed and when you owed it. The current interest rate used to calculate the penalty is 7% annually, which accrues monthly.

That may not sound like much—but since it’s not deductible, it has the same impact as earning 11% less on that same money.

Why Withholding Beats Quarterly Payments

Here’s the trick: the IRS treats withholding (from W-2 jobs, IRA distributions, or bonuses) as if it were paid evenly across all four quarters, no matter when it was actually withheld. That’s not true for estimated tax payments, which are time-sensitive.

This means you can:

  • Catch up late in the year with one large withholding
  • Use an S corp bonus to make up shortfalls (just beware of payroll tax costs)
  • Adjust withholding on W-2 wages if you or your spouse are employed
  • Use the IRA rollover-withhold-redeposit strategy to hit your targets without draining cash flow

Three Powerful Strategies

1. Year-End Bonus Withholding
Have your S corp or C corp issue a bonus in December with higher-than-normal withholding. This can backfill your shortfalls from earlier quarters.

2. W-2 Adjustment Mid-Year
Update your W-4 with your employer and increase your tax withholding. This is especially useful for married couples where one spouse has a salaried job.

3. The IRA Withholding Strategy
Take a distribution from your IRA, withhold 100% for taxes, and redeposit the full amount within 60 days. It’s a legal workaround to make a large “withholding” payment without penalty—as long as the funds are restored on time.

Safe Harbor Rules Still Apply

To avoid penalties, the IRS offers Safe Harbor guidelines:

  • Pay 90% of your current year tax OR
  • Pay 100% of last year’s tax liability (110% if your AGI is over $150,000)

Withholding can be used to meet these thresholds and reduce or eliminate penalties—especially when estimated payments have been missed.

Don’t Wait for a Penalty Notice

If you think you’re behind on estimated payments, don’t panic—but don’t wait either. These strategies work only if executed before year-end. That’s why we recommend doing a tax projection in Q3 or Q4 to evaluate your current position.

📍 Serving clients throughout Florida and across the U.S., Polaris Tax & Accounting helps individuals and business owners stay compliant and penalty-free.

👉  Schedule a consultation today before the next IRS deadline.