Tricky Way to Avoid Underpayment Penalties

This one goes out to S-Corp owners.

We all know the IRS likes their hot little hands on your money during the year, and thus if you’re not paying in a certain amount of tax during the year (110% of the prior year tax liability or 90% of your current tax liability) they will charge you an underpayment penalty.

Because of this, they want individuals, especially business owners, to pay in quarterly estimated taxes during the year. If you’re not paying your estimates evenly, (meaning you pay it all in for Q4 and none in the other quarters), you’ll still get hit with an underpayment penalty.

One fact that the IRS doesn’t care if you know, is that W-2 withholdings are counted as being paid in “all year”, even if they’re not evenly distributed in paychecks throughout the year.

That means, you can run one big pay-check at the end of the year, withhold the necessary taxes to the federal and state governments, and avoid any type of underpayment penalty, even though you did not pay in throughout the year.