If most of your income is a salary, withholding usually takes care of your taxes. Stock compensation changes that. Vests, option exercises and stock sales are often under-withheld, and the IRS expects tax to be paid as income is earned, not all in April.
Do you need to pay estimates?
You may need to make estimated payments if withholding will not cover enough of your tax. The penalty for underpaying is calculated like interest on the shortfall for each quarter it was short.
The safe harbor rules
You generally avoid an underpayment penalty if your withholding and estimated payments add up to at least:
- 100% of last year’s tax (110% if last year’s adjusted gross income was over $150,000), or
- 90% of this year’s tax.
The prior-year option is popular with tech employees because it is a known number. You can still owe a large balance in April, but without a penalty.
Federal deadlines
| Payment | Due |
|---|---|
| Q1 | April 15 |
| Q2 | June 15 |
| Q3 | September 15 |
| Q4 | January 15 of the next year |
States have their own rules
Most states with an income tax also require estimates. California, for example, front-loads them: 30% of the year’s estimate in April, 40% in June, nothing in September and 30% in January.
Two useful shortcuts
- Withholding counts as paid evenly. Extra federal withholding from your paycheck, even late in the year, is treated as if it were paid evenly through the year. Raising your W-4 in November can fix an earlier shortfall.
- The annualized method. If a big vest or exercise happens late in the year, you can calculate the penalty based on when the income actually arrived, using Form 2210 Schedule AI.
Not sure how far behind you are? Try our RSU tax calculator.