Missed your quarterly estimates this year? You’re not alone. The IRS underpayment charge is nondeductible, compounds daily, and snowballs fast. Writing a big check today will stop new penalty accrual from this point forward, but it won’t erase the penalties tied to the quarters you already missed.
There is, however, a lawful way to make it as if you paid each quarter on time. It relies on how the tax code treats withholding from retirement distributions.
The Core Idea
Tax withheld from certain retirement-plan distributions is treated as if it were paid evenly throughout the tax year, regardless of when you actually withhold. That timing rule lets you retro-allocate withholding to April/June/September/January and eliminate underpayment penalties for earlier quarters.
You can use that rule in two primary ways.
Method 1: The 60-Day Rollover With Withholding (All Ages)
How it works
- Take a distribution from an eligible retirement account and instruct the custodian to withhold enough federal income tax to cover your full-year estimated-tax need.
- Within 60 days, redeposit the gross amount of the distribution back into an eligible account (a tax-free rollover).
- Result: the withholding is deemed paid ratably across the four due dates, which erases the underpayment penalties. The completed rollover prevents the distribution from being taxable (and avoids early-withdrawal penalties where applicable).
Example (simplified)
You were supposed to pay four estimates of $25,000 and paid none by April 15, June 15, or September 15. In October, you instruct your IRA custodian to distribute $100,000 and withhold $100,000 to the IRS. Within 60 days, you redeposit $100,000 from your brokerage account back into the IRA.
• The $100,000 withholding is treated as if $25,000 was paid on each quarterly due date.
• Your underpayment penalties drop to zero for those quarters.
• The rollover keeps the distribution non-taxable.
Method 2: Use Your RMD (Age 73+)
If you’re 73 or older and owe a required minimum distribution this year, elect enough federal withholding from the RMD to cover your shortfall. RMD withholding is also treated as paid evenly throughout the year, so it can eliminate penalties while simultaneously satisfying the RMD requirement.
When a Late-Year Payroll Bonus Makes Sense — and When It Doesn’t
Some owners must show W-2 wages to satisfy S-corp “reasonable compensation” requirements. In that specific case, a late-year payroll bonus with heavy withholding can be appropriate: you 1) true-up reasonable comp and 2) clean up estimated taxes in one shot. That’s defensible and often necessary.
Outside of that use case, forcing payroll just to create withholding is usually the more expensive route:
- You’ll incur additional FICA/Medicare (owner and employer share).
- Converting profit to wages can reduce the §199A QBI deduction.
- If you don’t have a payroll mechanism at all (no active business, retired, or otherwise not running W-2 payroll), standing up payroll solely for withholding is clumsy and costly.
Bottom line:
- Need to hit reasonable comp? A W-2 bonus with proper withholding is reasonable.
- Already at reasonable comp or no payroll? Use retirement withholding + 60-day rollover (or RMD withholding if applicable) to backfill quarters with less drag.
Eligible Accounts and Key Limits
Eligible for the 60-day rollover approach
- IRAs: Traditional, Roth, SEP, SIMPLE
- Employer plans: 401(k), 403(b), 457(b) (subject to plan distribution rules)
Important constraints
- IRAs: Only one 60-day rollover per 12-month period across all your IRAs combined. Plan sequencing carefully.
- Employer plans: The “one-per-year” IRA rollover limit does not apply, but your plan must permit an eligible distribution.
- All ages: Strategy is available at any age if a distribution is permitted and you can complete the rollover within 60 days.
Guardrails and Gotchas
- Cash readiness. Have funds available to redeposit within 60 days. Miss the window and the distribution becomes taxable (and potentially penalized if under 59½, depending on account type).
- Precise instructions. Coordinate with the custodian on withholding percentages, lead times, and documentation; build in a cushion for processing delays.
- State exposure. If you owe state estimates, consider state withholding simultaneously (state rules vary).
- Classification hygiene. If you’re consistently short because of contractor vs employee issues or uneven draws, tune up reasonable compensation and implement an accountable plan so this doesn’t become annual drama.
- Rates move. Underpayment interest rates adjust quarterly and compound daily. The rollover method fixes timing, which is why it neutralizes past-quarter penalties.
Quick Decision Map
- Behind on 2025 estimates and need to erase penalties:
- Age 73+ with RMD due: elect sufficient federal withholding from the RMD.
- Otherwise: use the 60-day rollover + withholding from an eligible account.
- S-corp owner below reasonable comp:
- Consider a late-year W-2 bonus with heavy withholding to satisfy reasonable comp and mop up estimates. Model FICA and §199A impacts first.
- Already at reasonable comp or no payroll in place:
- Prefer retirement withholding (60-day rollover) or RMD withholding over standing up payroll just to create withholding.
- Then fix next year:
- Lock safe-harbor targets, calendar due dates, and consider a small year-end withholding top-off to avoid repeats.
Bottom Line
You can’t backdate an ACH from October to April, but the tax code lets retirement withholding count as if it were paid all year long. Use a 60-day rollover (or RMD withholding if you’re 73+) to eliminate 2025 underpayment penalties now, then set an estimate cadence that makes this a one-time rescue, not an annual ritual.
This article is educational; specifics depend on your plan documents and profile. We set up custodian instructions, document the rollover, and model payroll vs retirement-withholding trade-offs so the fix is clean and defensible.
Author: Mike DiSabatino
About the author:
Mike DiSabatino is the founder of SharpCFO and principal of We Do Books, Inc., a boutique finance and tax firm based in Arizona. A former CPA and long-time CFO, Mike blends hands-on operating discipline with deep tax strategy and banking know-how. He’s uniquely “dual-track”: while running a CPA firm and serving as a CFO, he also operated as a California real-estate broker originating and underwriting mortgages—so he understands both corporate credit and the personal, lender “global cash flow” lens. Mike advises growth-minded owners on cash flow, bank packages, pricing, exits, asset protection, and smart tax planning that actually holds up. When you need big-league finance without the big-company bloat, he’s your guy.