2022 Year-End Tax Planning: Do You Have Enough Tax Withheld?

If you had a significant increase in income in 2022, or if you owed a lot of taxes last April 15, you may be at risk for incurring a tax underpayment penalty. 

The IRS requires you to have 90% of your current tax paid in by the end of the year.  Taxpayers are required to have the tax paid in pro-rata throughout the year, either through withholding or quarterly estimated tax payments.  They do offer a safe harbor that keeps you free from penalty if you have 100% of your 2021 tax paid in (110% if your adjusted gross income is over $150,000 joint/$75,000 single).  

Year-End Tax Withholding 

If you don’t currently meet either of these targets, there is still time to mitigate or eliminate the penalty.  For example, if you are expecting a year-end bonus, you could have extra tax withheld on that payment to make up the difference.  Even though that is not a pro-rata payment, the IRS counts any withholding, regardless of when it is withheld, as pro-rata.  You can also make a quarterly payment by January 15 for the difference.  This will probably not eliminate the penalty, but it will lower it somewhat. 

If you don’t earn income evenly throughout the year, check out the provision for annualizing your income when you file your taxes.  It’s complicated, but it may save you a penalty. 

If you are not able to pay in the tax now, make provisions to have the money you need set aside so you can pay it in by the 2022 filing date of April 18.  Even though you can extend your tax return, you can’t extend the time to pay your tax.  Late payments are subject to additional penalties. 

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Your DWD accountant can help you understand the requirements to minimize your underpayment penalties.