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What You Need to Know About Excess Tax Withholding

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March 01, 2018 | Barbara Baksa

What You Need to Know About Excess Tax Withholding

One of the most common questions I am asked is whether it is permissible for companies to allow employees to request additional withholding on their stock awards. It seems like a simple yes or no question, but the answer is actually quite a bit more complicated. And I’m asked it often enough that I decided it would be handy to have an article I could point people to that will hopefully address all their questions.  So I wrote one: “Excess Tax Withholding: What You Need to Know.” Everything you ever wanted to know about excess tax withholding in about 2,000 words.

And at just over 2,000 words, the article is about four times longer than a blog entry should be. So here are a few highlights to entice you to read the whole thing:

  • The IRS allows employees to request additional withholding on their stock plan transactions but only if they have received less than $1 million in supplemental payments during the year and only if you agree to calculate their withholding using their Form W-4, rather than using the optional flat rate that applies to supplemental payments.
  • The IRS is concerned enough about excess withholding that they issued Information Letter 2012-0063 to address the topic (or maybe they just get as many questions about it as I do). They managed to cover the topic in about 500 words less than I did. 
  • The IRS’s letter is pretty clear that they don’t want employees to request a different withholding rate without going through the W-4 process. Here is a quote from the letter:

If the employer is using the optional flat rate withholding method, the employer must withhold at the optional flat rate and cannot take into account requests by the employee that the rate be increased or lowered.

  • Withholding at the W-4 rate is hard; you probably have better things to do with your time.
  • The IRS cares about this because they are worried employees will request additional withholding on their supplemental payments to circumvent having the appropriate amount of taxes withheld on their regular wages.
  • ASU 2016-09 makes it easier to allow employees to request additional withholding when shares are withheld to cover the tax payments, but there are still a few accounting traps for the unwary to watch out for.
  • Just say “no” to withholding for outside directors. I’m not kidding; don’t do it.

- Barbara

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