Originally Posted by Tanya
I recently received a substantial increase in my income through a bonus. My payroll withholding was not adjusted correctly to reflect my new tax rate based on the higher income in 2007 due to the bonus.
I was concerned about underpayment penalties and interest in case of not paying an estimated tax payment to pay for the extra tax on the bonus. Is it better to make a payment immediately following the bonus? Will I avoid penalties and interest and does this it make sense?
If you use the annualized method, form 2210 (which is complicated) you may be ok. Annualized method is used for cases like yours where a disproportionate amount of income occurs in a very short time, like during one quarter of the year. A seasonal business is a good example of this. I had the same situation with a large capital gain, and the annualized method did help. Tell your preparer about it if it doesn't get brought up. Also ask him/her about safe harbor rules.