It’s that time of year again. Tax returns (and balances due!) are on everyone’s mind as we march towards Tax Day. So what should you do if you owe tax on your return? 

Quite often, people are seeking us out this time of year after loading their information into TurboTax and being shocked at the results. It might be the first year they’ve had equity compensation. Or perhaps this is the first year with a significant vesting or sale transaction.

Clients are often surprised about the role of employer withholding in their balance due.

Equity compensation is lumped together with bonuses and commissions and withheld at a flat 22% tax rate by employers. The IRS requires this for anything it calls “supplemental compensation.” 

While 22% “feels” like a lot, especially when bundled with Social Security at 6.2% and Medicare at 1.45% and your state tax rate, the truth is – your Federal tax rate might be quite a bit higher than the 22%.

The 24% tax bracket starts at $100,525 single ($201,050 for married couples). This means that $50,000 of equity compensation will be expected to generate a $1,000 balance due at tax time even if you’ve nailed your W-4 withholding.

The Problem

While it’s not great to have a balance due at tax time, there’s also a potential for additional IRS penalties. What many clients don’t realize is that the IRS expects you to pay your tax evenly throughout the year. And if you don’t meet their safe harbors to pay, they can tack on underpayment interest. 

The current rate for underpayments for Q1 & Q2 2024 is 8%! (Yes, the IRS keeps up with rising interest rates as well, just like your mortgage lender…)

When rates were only at 3% back in 2022, this was certainly less of a concern. At today’s rate, a $25,000 balance due left unpaid all year could result in an extra $2,000 tax bill come April 15th.

The Solution

To avoid this additional outlay to the IRS, you can estimate your expected tax bill throughout the year. This is especially important if you have equity compensation that can vary quite a bit as stock prices do throughout the year.

At the very least, you’ll want to meet one of the two IRS safe harbors for estimated payments.

IRS Safe Harbor Estimated Tax Rules

  • Pay 90% of your expected liability for 2024 taxes OR
  • Pay in 110% of your actual liability from 2023 taxes

If your income (and withholding at your workplace) is on an upward trend due to a big raise or promotion, you might easily meet the 110% of liability from your 2023 return. In this case, you might be able to avoid estimated payments. BUT, you still want to be on top of any potential balance due come April 2024.

If your income is about the same, or less than 2023, it’s important to plan now to make sure you are paying in at least 90% of your expected tax liability.

Get Help

If you need help estimating your tax liability for the year, we can help!

We enjoy helping our clients plan for taxes and answering questions throughout the year. In fact, it’s the most important part of our job here at McCarthy Tax!

If you’d like to learn more about our tax projection and in-depth tax planning services, schedule a call with us.

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