This year, I will make a substantial portion of my income through RSU (stock) compensation. What I just realized today is, for some inexplicable reason my employer does not use my W-4 for tax withheld on RSUs, instead requiring employees pick a static %, which defaults to 22%.
I have now increased this % for future payouts, but because of the low witholding I have approximately underpaid my federal income tax for 2025 by about $2.5k.
Questions:
- So the right thing to do here is to make an estimated payment to the IRS of the $2.5k, right?
- I see that I'm before the deadline (January 15th), but that's supposed to be for income of Q4. My actual RSU income is approximately evenly distributed over 2025 – is that going to be a problem?
- Is there anything else I need to be aware of now or when filing in April?
ETA: Solved! Thanks for the information, I didn't know about the 110% safe harbor.
Underpaid federal income tax – What to do?
byu/CreditCards254 intax
Posted by CreditCards254
7 Comments
> for some inexplicable reason
Because 22% is the IRS supplemental withholding rate.
Look at your last paystub of 2025 and find the YTD value for federal withholding.
Does this number exceed 110% of line 24 of your 2024 1040? If so you’re fine.
Adjust your W-4 to try to hit 110% of your 2025 total tax.
Just pay it in April when you file your taxes! I always underpaid thru the years then just sent a check/do auto-withdrawl for April 15th. There’s a certian % of under-payment where there is no penalty, and even once you get into the penalty range its cheap. I underpaid by like 10% one year and the penalty was like $30.
I’d rather owe a grand or few than give the government a free loan of my $$ that I have to wait and hope to get back.
Have you withheld the safe harbor amount based on 100% or 110% of your tax liability last year? If so, you can just pay the rest by April 15 with no penalty. Otherwise, pay by January 15 and expect a minor amount of penalties for underpayment of previous estimated tax installments.
There are two methods for your employer to calculate withholdings. The regular method is controlled by your W-4, which annualizes your income to determine your withholding. The supplemental method is a flat 22% and is often used for bonuses and other non regular payments.
Making an estimated tax payment before Jan 15, will minimize any under withholding penalties that you may be subject to.
If you didn’t pay in enough taxes for each quarter you may be subject to an under withholding penalty – essentially interest on the unpaid amount.
A common mistake with RSU’s is when they are sold, and some may have been sold to “cover” taxes already is that the basis is not reported on the 1099-B that you will receive for the sale. Your basis in the RSU is the amount that was included in your wages when you received the RSU, and will need to be adjusted when you report the sale. For shares received and sold on the same day there should be no gain, and possible could be a small loss due to fees.
Grab your 2024 Form 1040.
Look at page two, line 24. That’s your total tax.
Now total up your 2025 federal withholding from all sources.
If your 2025 total withholding is equal to or greater than 110% of your 2024 total tax, you won’t be subject to the Underpayment penalty even if you owe more than $1,000 when you file for 2025.
You will still have to timely file and pay any balance due in full to avoid the Failure to Pay penalty and interest.
The inexplicable reason is IRS regulations.
22% is the IRS supplemental withholding rate.
If your withholding for the year is 110% of your 2024 liability, you will meet the safe harbor and have no penalty.
Alternatively, if your actual withholding is at least 90% of this year’s liability, you also meet the safe harbor.
Otherwise. The penalty is simple interest at 7%, so it’s going to be in the $80 range. If you use software to file, do not pay the penalty the software calculates. Just pay what you owe normally and wait for the IRS to send you a bill. They often won’t even bother to do so for small amounts.