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How to make the IRS penalty go to zero
You don't have to pay every dollar of tax on time to avoid a penalty. You just have to pay one of two safe-harbor numbers by year-end.
Pay in at least 110% of last year's total federal tax through withholding and estimates by December 31. The IRS charges no underpayment penalty, even if you still owe at filing.
The two safe harbors
The IRS gives you two ways to be safe from an underpayment penalty. You pick whichever is easier:
- 110% of last year's tax (100% if your prior-year AGI was under $150k). This is the one most RSU holders use. It's a fixed number you can compute in January.
- 90% of this year's tax. Only useful if you can project this year accurately, rare in a big vest year.
Extra W-4 withholding vs. 1040-ES vouchers
W-4, line 4(c): extra withholding per paycheck
The cleanest path. Any dollar withheld from your paycheck is treated as if it were paid evenly across the year, no matter when in the year it was actually taken. That means a big Q4 W-4 bump can cure a Q1 underpayment.
Ask HR to update your W-4 to add a flat extra federal withholding amount for the rest of the year. Divide the shortfall by the number of remaining paychecks. Done.
1040-ES vouchers: direct estimated payments
Pay directly to the IRS at IRS Direct Pay, or by mailing a 1040-ES voucher. Simple, but the IRS treats each payment as paid on the date you sent it, so late payments don't cover early quarters.
Estimated payment due dates
| Period | Due date |
|---|---|
| Q1 (Jan–Mar) | April 15 |
| Q2 (Apr–May) | June 15 |
| Q3 (Jun–Aug) | September 15 |
| Q4 (Sep–Dec) | January 15 (next year) |
Note the uneven periods. Q2 is two months, Q3 is three, Q4 is four.
A practical playbook after a big vest
- Pull last year's Form 1040, line 24. Multiply by 1.10.
- Add up federal withholding on all pay stubs YTD, projected through year-end.
- The gap between the two is what you need to pay in via W-4 bump or 1040-ES.
- Ignore what you'll actually owe at filing until you file. The safe harbor is the goal.