Do you Need to Make a Q4 Estimated Tax Payment?

The deadline for 4th Quarter estimated tax payments is January 15th. In order to avoid an Underpayment Penalty, corporate executives often need to make quarterly payments to the IRS.

Why is it common for Executives to not withhold enough tax solely through payroll deductions?

The primary culprit is that "supplemental income" - which includes bonus payouts and equity compensation - is often withheld at 22% by default. For high earning corporate executives, this 22% withholding rate is significantly less than their marginal tax rate which can result in an underwithholding penalty.

So, how do you know if you need to make a 4th quarter payment to the IRS?

According to the IRS, you'll owe an underpayment penalty if your withholding and tax credits are less than the smaller of:

1. 110% of the tax shown on your 2023 tax return, or
2. 90% of the tax to be shown on your 2024 tax return

A little puzzling at initial glance, but the simplest way to check if you need to make an estimated tax payment is to test for the 110% threshold:

1. Sum up your YTD withholding and expected remaining withholding for the tax year. Paystubs are the primary source for this information.
2. Compare this amount to your 2023 total tax owed which you can find on Form 1040 box 24 of your 2023 tax return.
3. If the sum of your 2024 tax withholding is at least 110% of your 2023 total taxed owed, then you do not need to make a quarterly payment.

If you do not pass the 110% test, you'll check to see if your 2024 withholding is at least 90% of your expected 2024 total tax owed. Since most people do not know their 2024 total tax owed, yet, using an online tax calculator or consulting with a professional are the most common options.

Tax Planning is part of TFP's Comprehensive Wealth Management service. If you need guidance determining whether you need to make a payment, TFP can help you.

Tips for Managing Withholding in 2025

1.) Increase Withholding on Equity Compensation: Many employers, including Walmart, allow employees to adjust the withholding rate on equity compensation. In the case of Walmart, employees would make the adjustment through Fidelity Investments, the administrator of the Restricted Stock and Performance Share Plans.

2.) Allocate Withholding to Q1: Since bonuses and equity compensation typically payout in Q1, taxpayers are allowed to allocate withholding to earlier in the year. While this does not eliminate a need for quarterly payments it does allow you to defer quarterly payments to later in the year.

Setting Up for a Successful 2025!

The beginning of the year is a great time to get your finances organized and aligned with your long-term goals. This may include:

1. Investments: Reviewing your investment portfolio to ensure that your investment strategy is aligned with your long-term goals.
2. Taxes: Understanding the trade-offs of various tax reducing strategies and implementing the best ones for you.
3. Cash Flow: Projecting your cash inflows and outflows so you can be intentional with your spending and saving in 2025.
4. Retirement Planning: Checking how close you are to financial independence and identifying steps you can take to accelerate the journey.

If you would like to learn more about working with us, feel free to schedule a quick introductory call.

Thanks for reading,

Mark Chisenhall, CFA, MBA

Financial Advisor | Founder of Taurus Financial Planning

Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.

This publication is for informational purposes only and is not intended as tax, accounting or legal advice or as an offer or solicitation of an offer to buy or sell or as an endorsement of any company security fund or other securities or non securities offering. This publication should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.