Equity Compensation and Estimated Taxes: How to Avoid a Surprise Tax Bill
A large salary does not necessarily create a large tax surprise.
A large change in compensation, however, often does.
RSU vesting, bonuses, stock-option exercises, investment gains, and other variable income can cause a taxpayer's actual federal liability to grow much faster than the amount withheld through payroll.
For employees with significant equity compensation, reviewing taxes only when the return is prepared can therefore be too late.
Why Equity Compensation Creates Withholding Problems
Federal income tax is a pay-as-you-go system. Tax generally needs to be paid throughout the year through withholding, estimated payments, or a combination of both.
The challenge is that payroll withholding does not necessarily know your entire financial situation.
Your employer usually does not know about:
Your spouse's income
Investment gains
Income from another employer
Rental or business income
Significant deductions
Prior estimated payments
Large stock transactions outside payroll
Even when taxes are withheld from an RSU vest or bonus, the amount may therefore be insufficient for the household's overall tax liability.
The 22% Supplemental Withholding Rate Can Be Misleading
In 2026, employers may generally use a flat 22% federal withholding rate on certain supplemental wages up to $1 million. Supplemental wages above $1 million are generally subject to the highest 37% withholding rate.
Consider someone whose actual federal marginal tax rate is 35%.
If $200,000 of additional compensation is withheld at 22%, the employee might initially have approximately:
$44,000 withheld
But 35% of $200,000 is:
$70,000
That does not mean the taxpayer automatically owes another $26,000, because the final return includes many other items. But it illustrates why the withholding shown on an equity-compensation statement should not be confused with a completed tax projection.
RSUs Can Push Other Income Into Higher Rates
A large RSU vest can increase overall taxable income enough to affect:
Marginal income-tax rates
Capital-gain taxation
Net Investment Income Tax
Additional Medicare Tax
Deduction and credit limitations
Estimated-tax requirements
For example, the 3.8% NIIT applies to the lesser of net investment income or MAGI above statutory thresholds, including $250,000 for married couples filing jointly and $200,000 for single or head-of-household taxpayers.
RSU wages themselves generally are not net investment income, but higher wages can push MAGI above the threshold and cause investment income to become subject to the tax.
Additional Medicare Tax Uses Different Rules
A separate 0.9% Additional Medicare Tax applies to Medicare wages and certain other earned income above specified filing-status thresholds.
Employers, however, generally begin withholding Additional Medicare Tax when that employer pays an employee more than $200,000 of Medicare wages, without considering the spouse's earnings or the taxpayer's ultimate filing status.
This can produce unexpected results for married couples where both spouses work or where one spouse receives substantial equity compensation.
Estimated-Tax Safe Harbors Matter
A taxpayer can potentially owe additional tax with the return without necessarily owing an underpayment penalty.
For higher-income taxpayers, one commonly relevant federal safe harbor generally requires paying through withholding and timely estimated payments at least the smaller of:
90% of current-year tax, or
110% of the prior-year tax when prior-year AGI exceeds the applicable higher-income threshold.
Publication 505 specifically notes the 110% prior-year standard for taxpayers with prior-year AGI above $150,000, or $75,000 for married filing separately.
But merely avoiding an underpayment penalty is not necessarily the same as having enough cash set aside to pay the eventual balance due.
Why Withholding Can Be Especially Useful Late in the Year
Employees with wages often have another planning tool available: changing payroll withholding.
The IRS allows employees to submit a new Form W-4 when they need to change the amount withheld from future paychecks.
This can sometimes be helpful when a projection late in the year identifies a shortfall.
Estimated payments and payroll withholding can have different timing rules for penalty purposes, so the appropriate method should be considered in the context of the taxpayer's situation rather than automatically choosing one.
When I Would Recalculate a Projection
For someone with variable equity compensation, I would generally consider updating the tax projection after major events such as:
A substantial RSU vest
A large bonus
An ISO or NSO exercise
A major stock sale
A change in employment
A large capital gain
A move to another state
A spouse beginning or leaving employment
A major change in expected annual compensation
It often makes sense to perform the projection more than once during the year if compensation is changing significantly.
What Information Is Needed?
A useful projection might include:
Most recent paystub
Year-to-date wages and withholding
Upcoming RSU vesting schedule
Expected bonuses
Stock-option transactions
Capital gains and losses
Spouse's wages and withholding
Prior-year tax return
Estimated payments already made
Expected business or rental income
Major deductions or charitable gifts
The goal is not to predict every dollar perfectly.
The goal is to get close enough to identify a meaningful shortfall while there is still time to do something about it.
Planning Before Year-End
Equity compensation can create significant wealth, but it can also make tax payments far less predictable.
A year-end surprise is often not caused by an unusual tax rule. It is caused by relying on payroll withholding that was never designed to account for the taxpayer's complete financial picture.
Periodic tax projections can help determine whether withholding should be changed, estimated payments should be made, or additional cash should simply be reserved for the eventual tax bill.
Concerned Your Equity Compensation Is Under-Withheld?
If RSUs, stock options, bonuses, or investment gains are causing your income to change significantly, we can prepare a tax projection, review your current payments, and help determine whether adjustments may be appropriate before year-end.
This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Tax outcomes depend on individual circumstances and applicable law.