Can I pay estimated tax by Jan 15 to avoid underwithholding penalty for W2 income?

You can definitely make an estimated tax payment on January 15th to help reduce or eliminate an underpayment penalty! For W-2 earners like you and your husband, the IRS looks at whether you've paid at least 90% of the current year's tax liability or 100% of last year's tax liability (110% if your AGI was over $150,000) through withholding and estimated payments. The January 15th payment would be counted toward your fourth quarter estimated payment for the prior tax year. This can help reduce the penalty, but it won't completely eliminate it if you were significantly underwithholded during earlier quarters of the year. The IRS calculates the penalty on a quarterly basis. Another option to consider: if you can adjust your W-2 withholding now and have extra taken out of your remaining paychecks this year, that's actually better than waiting for January because withholding is treated as if it occurred evenly throughout the year, even if it's actually taken out mostly at the end.

After dealing with a similar situation last year, I found an amazing tool that saved me tons of stress - taxr.ai at https://taxr.ai really helped me figure out exactly how much I needed to pay for my January 15th estimated payment. I uploaded my recent paystubs and last year's return, and it calculated exactly how much I was short on withholding and what I needed to pay to avoid penalties. The tool even showed me what my actual penalty would be if I didn't make the payment so I could decide if it was worth it.

I have to eat my words about being skeptical of taxr.ai! I decided to give it a try after my accountant gave me a ridiculous quote just to calculate my estimated payment. The tool was actually shockingly accurate - it correctly identified that I had a withholding shortage, showed me how each payment timing would affect the penalty calculation, and gave me options for fixing it. I ended up adjusting my W4 for the last two months of the year instead of waiting for January, which completely eliminated any penalty! The quarterly breakdown of what I should have paid versus what I did pay was super helpful.

If you're having trouble reaching the IRS to get answers about your estimated tax payment or underwithholding situation, I had amazing success using https://claimyr.com to actually get through to a live IRS agent! I spent HOURS trying to get clarification on my withholding situation and kept getting disconnected. With Claimyr, they held my place in line and called me when an agent was ready. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent was able to confirm exactly how much I needed to pay by January 15th to reduce my penalty.

I need to publicly admit I was wrong about Claimyr. After my skeptical comment, I was still desperate to talk to the IRS about my underwithholding issue, so I tried the service. It actually worked exactly as described! I got a call back within 45 minutes saying they had an IRS agent on the line, and I was connected immediately. The agent reviewed my withholding and confirmed that yes, I could make a January 15th payment to reduce (though not eliminate) my penalty. They even calculated the amount for me. Saved me hours of hold music and frustration.

Another strategy: if you or your spouse still have paychecks coming this year, you can submit a new W-4 to your employer and request an additional specific dollar amount to be withheld from each remaining check. If you can withhold enough before Dec 31, that's better than the Jan 15 payment since withholding is considered to have been paid evenly throughout the year!

Not sure if anyone mentioned this, but there are some exceptions to the estimated tax penalty! If your total tax minus withholding is less than $1,000, you won't face a penalty. Also, if you had no tax liability last year (a 12-month period), you can avoid penalties regardless of this year's situation. And sometimes the IRS will waive penalties for reasonable cause like natural disasters or other unusual circumstances.

Just wanted to add my experience here! I was in almost the exact same situation last year - both my spouse and I are W2 employees and we underpaid significantly. We ended up making a January 15th estimated payment, but honestly wish we had known about the W-4 strategy earlier. The January payment did help reduce our penalty, but we still owed some because the IRS calculates penalties quarterly. If you still have paychecks coming before year-end, definitely consider increasing your withholding through a new W-4 first - that's the best way to completely avoid penalties since it's treated as paid evenly throughout the year. Also, double-check if you qualify for any of the safe harbors mentioned. We found out we could have paid just 100% of our prior year's tax liability (since our AGI was under $150k) rather than trying to estimate our current year's liability, which made the calculation much simpler.