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Year end bonus to pay S-corp taxes

I own an S corporation (Medical PC) in New York. I'm the only share holder. I made estimated payments for the first two quarters, that turned out to be much to low, since the the profit of the corporation is much higher that anticipated. Rather than bumping up my remaining two estimated tax payments by a significant amount (5 fold) and invoke scrutiny by the IRS, can I simply increase my remaining paychecks and increase the withholdings to make up the difference? OR, more extremely, can I wait until the end of the year and pay myself a big bonus paycheck that goes entirely toward taxes and covers the tax liabilities for the entire year?

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Estimated Tax Pymts vs Add'l Withholding

Yes. Tax withholding from your paycheck is assumed to be made evenly throughout the year. So you can have a big check at the end of the year that has additional amounts withheld. Don't forget employment taxes will apply to the additional salary. So it won't go completely to income taxes.


Thank you very much for the

Thank you very much for the info. This is fantastic news! I almost believe it's too fantastic to be legal. Has this been confirmed in any court case? Alternatively, do you know where I can read up on this in any tax laws? What it means is that one can go all year without paying ANY income tax, and pay everything through extra withholdings from a large bonus paycheck at year's end. What then, I wonder, is the whole estimated tax system for? Is it only for people who can't put enough money aside to pay it all at once on Dec 31? Somehow this seems not like something the IRS would go along with...

Withholding & the Underpayment Penalty

The US has a pay-as-you-go tax payment system. For employees, their income tax payments are withheld from their paychecks. For self-employed and others who earn income outside of a W-2 situation, they pay their taxes through estimated payments. Estimated payments are also used if your withholdings will not cover the taxes on other non-wage income.

So for some people, withholdings are not an option and they have to make estimated payments. These payment must be made as income is earned. If I sell a bunch of stock on April 10th and have a big gain. Technically I have to pay the tax on that income by June 15th. If I don't, I'll may have an underpayment to contend with. However, there are several exceptions, one is if the total tax minus the amount paid through withholdings is less than $1000 Pub 505.

Another exception is if my total withholdings & estimated payments total 100% of my prior year tax liability (110% if my AGI was > $150K MFJ, $75K MFS). In this case, my estimated payments would have to be made on time. But if I make no estimate payments & my withholdings alone meet this test, then voila, no underpayment penalty.

So given the situation you outlined in your original post, if I get a big bonus run through payroll at the end of the year and the income tax withholding on that check brings my total income tax withholding for the year to 110% of my 2007 tax liability, I have met the underpayment exception & I have no penalty. (I always try to hit the 110% mark to be on the safe side). This option doesn't work if it's just a check to the IRS. It has to be withholdings on W-2 wages.

Also, take a look at the short method for calculating the underpayment penalty on Form 2210, page 2 (instructions). It doesn't start calculating the underpayment penalty until after your withholdings are taken into account. There's even an exception, Page 1, item #D, that allows you to opt out of "...treating the federal income tax withheld from your income as paid on the dates it was actually withheld, instead of in equal amounts...."

There are other exceptions to the underpayment. See IRS Pub 505, Tax Withholding and Estimated Tax which covers this all in excruciating detail.

Hope this helps.

Dear Linda, Does

Dear Linda,
Does eliminating/reducing the estimated tax payments and paying a large bonus at the end of the year reduce/increase your overall taxes for the year if you own an S-Corp? If so which direction, and by how much? Estimated Payment are $36,000 quarterly(144,000 annually) and a $70,000 salary. Will this trigger any IRS scrutiny? Do the taxes have to be deposited in EFTPS before 12/31?

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