It can be like a snowball. If you owe a large amount of taxes for last year with your current income tax returns, you are also likely to owe estimates for this year (For more on estimates, see “Income Tax Estimates – Do I have to pay these?”).
Unfortunately for anyone in this situation, the first of the four quarterly tax deposits for this year are due on April 15th, the same day that you must settle up with any amount due for last year. It is not unusual to find that it is all you can do to scrape together the taxes due with your returns. This can understandably leave you unable to afford to pay your 1st quarter estimate.
Does this mean you will owe big penalties for this year?
It can, but it does not have to. First of all, you will not be able to determine your actual amount of 1st quarter underpayment until the end of the year. This is because if your current year income is lower than last year, the amount of your underpayment may also be lower than you may think.
By missing the 1st estimate, if you make each successive estimate on time, you will leave yourself with the possibility of being underpaid each of the four quarters (all year). This can definitely lead to unpleasant penalties by the time you get to April 15th of next year. The key is to catch up as soon as financially possible. For example if you double up in your second quarterly estimate, you will mitigate the penalties by only being underpaid the first quarter. This theory applies to any estimate that you may find yourself unable to satisfy throughout the year.
By striving to catch up, you minimize the occurrences of underpayment. By minimizing the occurrences of underpayment, you minimize the resulting underpayment penalties.
By increasing your payroll withholdings, you may totally eliminate the occurrence of being underpaid. W-2 reported withholdings are considered to be equally withheld throughout the year. Consequently, if you miss a first quarter estimate, but are able to increase your withholdings by an amount that eliminates the need to pay any estimates this year, you may effectively eliminate any potential underpayment penalty for late or underpayment of this year’s income taxes.