How Strategic Withholding Can Help You Avoid IRS Penalties

If you’re making quarterly estimated tax payments, you know the drill. Stay on schedule or pay the price. But what many taxpayers don’t realize is just how expensive a missed payment can be. The IRS currently charges a 7% penalty for underpayments. And, since that penalty isn’t tax-deductible, the true financial impact may feel closer to 11%.

The good news? You may still have time to avoid or reduce that penalty—even late in the year—by using strategic withholding instead of relying solely on estimated tax payments.

Why Withholding Works Differently

Estimated tax payments follow strict quarterly deadlines: April 15, June 16, September 15, and January 15. If you miss one, the clock starts ticking on penalties.

However, the IRS treats withholding differently. Whether the tax is withheld from your paycheck or from an IRA distribution, the IRS assumes it was paid evenly throughout the year—unless you choose to allocate it to specific quarters. This nuance creates planning opportunities that can work to your advantage.

Three Smart Strategies to Cover a Shortfall

If you’ve underpaid estimated taxes throughout the year, these strategies may help you get back on track:

• Year-End Bonus Withholding
  If you own an S-corp or C-corp, consider issuing yourself a year-end bonus and increasing the withholding. This can help make up the shortfall—but be mindful of potential payroll tax implications.
• Adjust Your W-2 Withholding
  If you have a job that issues a W-2, bump up your withholding in the final months of the year. You can document this withholding to either spread it evenly across quarters or allocate it directly to the quarter you need.
• IRA “Rollover & Replace” Technique
  Take a distribution from your IRA, have 100% of it withheld for taxes, and then redeposit the full amount within 60 days. If done correctly, this can satisfy IRS payment requirements without triggering income tax on the distribution.

Take the Right Steps Now

Estimated tax penalties are avoidable—but only if you plan ahead and understand your options. Strategic withholding gives you a powerful, flexible tool for managing your tax obligations and staying compliant. This is true even if your income shifts late in the year.

If you’re unsure how to apply these strategies to your situation, Illumination Wealth is here to help. Reach out to us today and let’s develop a personalized tax plan that keeps your money working for you—not the IRS.