Solve An Underpayment of Estimated Tax Problem

Posted November 2018

Employees may discover that prepayments of tax for 2018 have been too small because, for example, their estimate of income or deductions was off and they are underwithheld, or they failed to make estimated tax payments for unanticipated income, such as gains from sales of stock. Or they may be facing a penalty for underpayment of estimated tax because of the additional 0.9% Medicare tax and/or the 3.8% surtax on unearned income.

To ward off or reduce an estimated tax underpayment penalty, employees can ask their employers to increase withholding for their December paycheck(s) to make up or reduce the deficiency.

Employees can file a new Form W-4 or simply request that the employer withhold a flat amount of additional income tax. Increasing the final estimated tax payment for 2018 (due on Jan. 15, 2019) can cut or eliminate the penalty for a final-quarter underpayment only and does not help with underpayments for preceding quarters.

By contrast, taxes withheld can wipe out or reduce underpayments for previous quarters because, as a general rule, an equal part of the total withholding during the year is treated as having been paid on each quarterly estimated payment date.