Missing or underpaying quarterly estimated tax payments can trigger growing, non‑deductible underpayment penalties that quickly eat into your cash flow. But there are safe, IRS‑approved ways to stop that estimated tax penalty immediately. In this article, we explain practical fixes small business owners and retirees can use, including directing withholding from retirement distributions and using the 60‑day rollover rule, relying on RMD withholding for taxpayers 73 and older, and why W‑2 bonuses are usually a costly mistake.
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Understanding Estimated Tax Payments
Small business owners or self‑employed individuals who expect to owe $1,000+ at tax filing, or who have significant non‑wage income (self‑employment, interest, dividends, rent, gambling, retirement/unemployment without withholding), generally must make quarterly estimated tax payments and avoid IRS underpayment penalties.
When To Pay Estimated Tax
Quarterly estimated tax payments are due by specific dates each year: January 1–March 31 payment due April 15; April 1–May 31 due June 15; June 1–August 31 due September 15; and September 1–December 31 due January 15 of the following year (if the date falls on a weekend or holiday, the next business day applies). Fiscal‑year taxpayers, farmers, and fishermen follow special rules. You can pay online, by phone, or with the IRS2Go app — timely payments or proper withholding help with penalty avoidance and cash‑flow planning.
Who Should Make Estimated Payments?
Typical payers include freelancers, contractors, ride-share drivers, small business owners, landlords, investors with dividend or capital gains income, and individuals receiving taxable prizes or settlements. To calculate payments, project your expected income and tax liability for the year, coordinate with bookkeeping for taxes or a CPA/tax advisor if needed, and adjust quarterly tax payments as income changes to stay compliant, reduce surprises at tax filing, and avoid estimated tax penalties.
What Underpayment Penalties Cost When You Miss Estimated Tax Payments
Underpayment penalties hit taxpayers who don’t pay enough estimated tax during the year — generally if you don’t pay at least 90% of your current‑year tax or 100% of last year’s tax — or who pay installments late.
So if you missed estimated payments, trigger a non‑deductible penalty that compounds daily. For example, a skipped April 15, 2025, installment can grow into a substantial penalty by the time you file next year — roughly 7% (compounded) of the missed installment in the example facts. Writing a check today to cover past installments stops additional penalty growth but does not erase penalties already incurred.
How to Beat Estimated Tax Penalty — Instantly, Today
Suppose you are now at the end of the year and you missed your estimated tax payments and now face underpayment penalties. Writing a check or making an electronic payment today will stop further growth of underpayment penalties, but it won’t erase penalties you’ve already incurred — you’re already in the penalty box. The good news: there are three reliable ways to make the underpayment penalty disappear immediately if done correctly.
1. The 60‑day rollover solution
In that case, there is a lawful, immediate strategy to eliminate the penalty — but it requires specific retirement-plan rules and quick action. The IRS treats federal income tax withholding as estimated tax payments spread across the four quarterly due dates. By generating withholding via a retirement-plan distribution and then restoring those funds under the 60‑day rollover rule, you can create credited estimated payments for each quarter and remove the underpayment penalty.
The 60‑day rollover fix to eliminate your estimated tax penalty — step by step
- Confirm eligibility: You must have a rollover‑eligible retirement plan (Traditional IRA, Roth IRA, SEP, SIMPLE, 401(k), 403(b), or 457(b)).
- Create withholding: Take a distribution and instruct the plan custodian to withhold federal income tax and remit it to the IRS. That withholding is treated as estimated tax paid for the year.
- Repay within 60 days: Use available funds to redeposit the full distribution back into the retirement plan within 60 days. If you timely repay, the distribution isn’t taxed, and the withholding remains as credited estimated payments for the four due dates.
- Example: You owe $100,000 of estimated tax credit, but missed three installments totaling $75,000. Withholding $100,000 from a distribution and rolling the $100,000 back within 60 days effectively treats $25,000 as paid on each quarter’s due date, eliminating the underpayment penalty.
Important limits and cautions
- IRA one‑rollover‑per‑12‑month rule: You may only do one 60‑day rollover across all IRAs in a 12‑month period. This can be a constraint; trustee‑to‑trustee transfers or using employer plans (401(k), 403(b), 457(b)) avoid the limit.
- You must have cash available to repay the rollover within 60 days — otherwise the distribution becomes taxable and may incur penalties.
- This strategy requires precise timing and correct reporting; improper execution can create tax consequences.
2. Use RMD Withholding to Cover Missed Estimated Taxes to Avoid Estimated Tax Penalty
If you’re age 73 or older and must take a required minimum distribution (RMD) by year‑end, electing federal tax withholding from that RMD can be a smart way to catch up on missed estimated tax obligations. Withholding from your RMD meets the withdrawal requirement. It counts as federal income tax paid, which may eliminate the need for separate quarterly estimated payments and reduce the risk of underpayment penalties. Talk with your tax advisor to confirm withholding amounts and timing so the RMD both fulfills IRS rules and covers your estimated tax needs and eliminates your estimated tax penalty.
3. Use a W‑2 Bonus — but Beware the Cost
You can use a W‑2 bonus to create federal withholding that counts as estimated tax payments. Still, this alternative is usually expensive: for example, a $100,000 bonus paid through an S corporation can trigger roughly $15,300 in combined Social Security and Medicare payroll taxes (employee plus employer). It may reduce your 20% Section 199A deduction by lowering qualified business income. While withholding from wages does cure underpayment exposure, the payroll‑tax hit and potential loss of pass‑through tax benefits often make the bonus strategy worse than paying the underpayment penalty or using rollover/RMD withholding alternatives.
Do S Corporations Required to Pay Estimated Taxes? When Quarterly Payments Apply
Sometimes. An S corporation must make quarterly estimated tax payments only in specific situations — generally when the corporation’s total liability for certain taxes is $500 or more. Those taxes include the tax on built‑in gains, the excess net passive income tax, and the investment credit recapture tax. If none of those apply or the total is under $500, the S corporation typically has no federal estimated‑payment requirement.
When to Pay Self‑Employment Taxes?
If you owe estimated income and self‑employment taxes, you can either make four quarterly estimated tax payments or pay the full estimated amount by the first quarterly due date. For many small business owners and freelancers, spreading payments quarterly helps manage cash flow and avoid surprises. Still, you’re allowed to pay the entire estimated liability up front if that works better for you. Speak with your accountant to calculate the correct amounts and choose the timing that minimizes penalties (estimated tax penalty) and fits your cash‑flow needs.
How Partnerships File and How Partners Make Quarterly Estimated Tax Payments?
Partnerships report income and expenses on Form 1065 and issue Schedule K-1 (or K-3 for international items) to each partner, but the partnership itself generally pays no income tax — profits and losses pass through to partners, who report those amounts on their individual returns and are responsible for any income and self‑employment taxes. Because partners are not employees, partnerships don’t withhold tax from distributions, so partners who expect tax due should make estimated tax payments (using Form 1040-ES). Partners can pay estimated taxes by crediting an overpayment on their prior-year return, logging into their IRS online account, using Direct Pay, EFTPS, electronic funds withdrawal with e‑filing, the IRS2Go app, or by card, debit, or cash at approved locations.
Key Takeaways on Fixing Underpayment of Estimated Tax Payments and Avoid Estimated Tax Penalty
Missing or not paying enough estimated tax payments can trigger growing, non‑deductible estimated tax penalty — but you can eliminate them quickly by directing withholding from a retirement distribution and repaying the account within the 60‑day rollover window. This method works with many retirement plans (note: IRAs are subject to a one‑year rollover aggregation rule), and taxpayers age 73+ can also use federal withholding from required minimum distributions to cover estimates. Avoid curing shortfalls with a W‑2 bonus: payroll taxes and a potential reduction in your Section 199A deduction usually make that option far more expensive than the underpayment penalty. Consult your CPA to choose the best timing and documentation for your situation.
