Don’t Be Stuck with a Big Tax Surprise
Equity awards are common for corporate executives—and so is a weighty tax bill if appropriate action isn’t taken. See how to manage compensation-related taxes.
When you’re an executive in the corporate world, it can come with a lot of pressure and stress—and often many long hours. Anyone taking on such a high-profile leadership role already knows what they’re walking into. They also know that they’ll likely be well compensated in recognition of all the important work they must do.
However, being a corporate executive typically means that their compensation plan will be complex, and may include stock options, restricted stock units and other equity-based pay. But these equity awards—while potentially attractive and financially lucrative—may result in a large tax bill, especially for executives who earn enough to be in the top federal tax bracket.
That’s because when an executive exercises a large chunk of company stock options, the taxable income may come in a single calendar year. As a result, large stock option exercises are often accompanied by large tax surprises if the tax withholding is insufficient. Some people may enjoy being surprised, but not when it comes to paying more tax than anticipated!
Consider taking the following actions to cut this year’s tax bill and prepare for the next tax season.
Understand how equity awards are taxed
Executives who exercise stock options or have vesting restricted stock units (RSUs), performance share units (PSUs) and other equity awards might find that not enough tax was withheld. For some executives, their employers may automatically withhold taxes on equity awards that might be considerably below the proper amount, causing them to owe thousands more at tax time.
For example, one executive who received equity awards found that the withholding tax rate on her regular income was correct, but the default withholding tax rate for vesting stock awards was far too low. Her vesting PSU resulted in $40,000 of taxable income. Based on her total projected annual income, she was in the 35% marginal tax bracket. However, only 20% had been withheld from the award, which means she underpaid by about $6,000.
To manage this situation, she proactively made a $6,000 estimated tax payment directly to the Internal Revenue Service (IRS). This took any worry off her plate and prevented her from accidentally spending the money before April, which could’ve left her in a cash crunch at tax time.
Make a “safe harbor” payment
To avoid penalties for underpayment of taxes, anyone unsure of their tax liability is allowed to make a “safe harbor” tax payment.
Safe harbor means that you can avoid underpayment penalties if you have paid at least 90% of your actual current year tax or 110% of prior year taxes (or 100% of prior year taxes, depending on your income). Alternatively, you may also avoid such penalties if you owe less than $1,000 in federal taxes in a given tax year.1 Even if you don’t know how much your income will be in a given tax year, at a minimum you should consider making safe harbor payments to avoid an underpayment penalty.2
For example, let’s assume your 2025 federal income tax liability was $100,000. In 2026, you expect much higher income, but you’re unsure how it will impact your total 2026 tax bill.
As long as you pay a total of $110,000 (i.e., 110% of your 2025 federal tax) via withholding and estimated tax payments during 2026, you will avoid underpayment tax penalties. If it turns out that your 2026 tax bill is actually higher (say, $150,000), you will still owe the $40,000 shortfall, but the $110,000 safe harbor payment should protect you from any underpayment penalties since, in this example, it meets the stipulation of paying 110% of the previous year’s tax liability.
Plan for next year: Conduct a “paycheck checkup”
To avoid any underpayment problems in future years, ask your accountant to run a mid-year tax projection to ensure the amount of taxes withheld from each paycheck is on track for the year.
You may find that the amount needed to be withheld for taxes should be increased. To get an estimate of the right amount, you can use the IRS withholding tax calculator: https://www.irs.gov/individuals/tax-withholding-estimator.
If an adjustment is needed, complete a Form W-4, which lets your employer know how much money they should withhold from your paychecks. Some states have a similar form to adjust withholding at the state level. The withholding formula is based on marital status, number of children, income sources and other variables.
Here’s an example of a man who was starting his second year in a new job. Last spring, he was surprised to receive a large tax bill, including penalties and interest payments, from his work in the previous year. Upon reviewing his pay stub, it was discovered that only 20% of his pay was withheld for federal taxes. It should have been much higher—perhaps around 30%.
Since he unknowingly withheld less money for taxes in his first year with the new company, he had a false sense of security regarding cash on hand and his capacity to spend. He submitted a new Form W-4 to increase his withholding amount moving forward, thereby solving his tax underpayment issue for future years.
As the compensation structure for top talent becomes increasingly complex and potentially more lucrative, it’s essential to plan to avoid any unwelcome surprises—especially the kind of surprises that can mean owing more to the IRS. Taking a few hours now to protect your hard-earned money could pay off next spring and beyond. Consult with your accountant, tax professional and Corient Wealth Advisor.
1 https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-pay-and-when/L3OPIbJNw
2 https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
ABOUT THE AUTHOR
Ryan Halpern
Ryan is a Partner, Wealth Advisor in our Atlanta office. He joined legacy firm Brightworth in 2013 as a Financial Planner. He started his career at Ernst & Young, concentrating on the taxation and financial planning for high net worth individuals. He received his Master of Accountancy and Bachelor of Business Administration in Accounting with honors from the University of Georgia. Ryan is a Certified Public Accountant (CPA), a CERTIFIED FINANCIAL PLANNER® practitioner, and Personal Financial Specialist. Ryan’s articles on tax and other wealth management strategies have been published on CNBC.com, Kiplinger.com, Financial Advisor magazine, and the Atlanta Journal-Constitution. Ryan is a member of the American Institute of Certified Public Accountants, and currently serves on the Board of Directors at the Fox Theatre in Atlanta. Ryan lives in Atlanta with his wife, Stacey, their daughter, Hayden, and their son, Miller. Both Stacey and Ryan were born and raised in Atlanta and are proud supporters of the Atlanta Jewish community.
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5082710 – December 2025
