Avoiding the Tax Underpayment Penalty

It is not uncommon for Walmart Executives to get tagged with a Tax Underpayment Penalty by the IRS. As your earnings from "supplemental income" increase (i.e. MIP and RSUs), the default 22% withholding rate by Walmart is typically not enough. This means that it's the taxpayer's responsibility to proactively increase tax withholding throughout the year.

The penalty itself is not a huge deal. For high earning W-2 employees the penalty is usually less than $1,000 - likely not too painful for someone earning $350K+ per year.

The reason to avoid the Underpayment Penalty - besides not wanting to the leave the IRS a tip - is that it's the law, it keeps the April 15th payment more manageable, and you do not want to give the IRS any reason to audit you.

Here are 3 ways to manage your tax withholding and minimize any tax underpayment penalty:

1.) Increase Withholding: Walmart already withholds taxes on your income, but it may not be enough. You have a couple of options. First, you can boost tax withholding from your base salary by completing a W-4 form. Second, you may be able to increase tax withholding on RSUs through the Fidelity NetBenefits site, opting for 23% - 37% federal income tax withholding. I believe this is a new capability offered to Sr. Directors and above.

2.) Make Quarterly Tax Payments: The IRS allows you to make tax payments anytime you want. Unsurprisingly, the IRS makes this process very simple.

3.) Allocate Withholding on Tax Return: The IRS assumes that the withholding amount on your W-2 was paid evenly throughout the year. In some cases, taxpayers do not withhold evenly throughout the year, and they can make the adjustment on their tax return. This may be the case on withholding from your MIP and Equity Compensation earned in Q1.

So, will you pay a Tax Underpayment penalty? The rule is that you must pay in 110% of last year's tax liability or 90% of the current year's tax liability to avoid underpayment penalties. This is known as the Safe Harbor Rule.

A recent paystub and previous year tax return are good resources to solve for this. Then, be sure to account for any changes in pay, capital gains and other taxable income.

Running tax projections and helping clients estimate how much to withhold is part of my financial planning service. If you'd like me to run a 2024 tax projection to determine if you need to withhold more, click here to schedule a quick call. I'm happy to help.

Thanks for reading,

Mark Chisenhall, CFA, MBA

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.

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