Today was the deadline for the last quarerly estimated tax payment of 2005. We stayed pretty busy tweaking tax estimates and advising clients with questions about how much to send in with their last payment. Today was also the deadline for employers to deposit December FICA and withholding taxes. However, when making tax payments witholding and ES payments are not created equal.

Estimated tax payments are credited when paid meaning that if you wait until the last quarter to pay all four payments you will be underpaid for three quarters and penalized accordingly. But if you wait until the last pay period to pay all of your withholding it is treated as being paid equally throughout the year.

So why not pay yourself a bonus at the end of year and have it all withheld to avoid underpayment penalties? Becuase wages are subject to FICA tax. Waiting until the end of the year to withhold a large amount could cost you 15.3% in additional payroll taxes, all to avoid underpayment penalties of 4%-5% in 2005.

The best solution is to develop a strategy that uses ES payments as necessary but also takes advantage of withholding's flexibility to make up any shortfall at the end of the year thereby minimizing unnecessary payroll taxes and underpayment penalties. If you're unclear on how underpayment penalties are calculated or whether you may be subject to them make sure you ask during your next appointment with your CPA.

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