Can You Accommodate Requests for Additional 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 quite a bit more complicated. This blog covers key considerations for accommodating these requests. For even more information on this topic, see the NASPP article " Excess Tax Withholding: What You Need to Know.”

Why do employees request additional withholding?

The tax withholding that a company collects is merely an estimate of the employee’s tax liability. For many employees, their actual tax liability for their stock plan transactions may be significantly more than the flat rate that is normally applied to supplemental payments. No one wants to have to write a big check to the IRS at the end of the year. Moreover, where the withholding collected by the company is insufficient, employees could be subject to tax penalties.

Can companies allow employees to request additional withholding on their stock plan transactions?

The IRS allows employees to request additional withholding on their stock plan transactions if the following conditions are met:

1. The employees have received $1 million or less in supplemental payments during the year,
2. The company calculates the tax withholding on their equity plan transactions using the employees' W-4 rate, and
3. The employees request the additional withholding by submitting a new Form W-4.

When employees have received more than $1 million in supplemental payments during the year, the company must withhold at the highest individual tax rate. No other withholding rate is permitted.

Is there official guidance from the IRS on this question?

There sure is! The IRS issued Information Letter 2012-0063 to address the topic. The letter is pretty clear that the correct procedure for employees to request additional withholding on supplemental payments (e.g., stock plan transactions) is to submit an updated Form W-4. 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.

Why wouldn’t the IRS want extra withholding?

This is more about what is required under the US tax code than it is about what the IRS wants. Federal income tax withholding rates are stipulated under the US tax code. There is no statutory framework to support procedures that would allow employees or employers to select a tax rate other by following the process outlined in Information Letter 2012-0063.

The IRS does not enact tax law; it merely interprets the laws enacted by Congress. IRS representatives have indicated to us that they are sympathetic to employers’ concerns on this matter, but they have to promulgate procedures that align with the statutory requirements.

Another concern here is that employees will purposely select a withholding rate on their Form W-4 for their regular compensation that is insufficient, then engage in a stock plan transaction at the end of the year and request additional withholding on that transaction as a means of making up for the underwithholding and, thus, avoiding the penalties they should owe for not having instructed the company to withhold appropriately on their regular wages. This sort of scheme could constitute tax fraud, which is not something the company would want to be party to.

I sense your skepticism that any employees would do this, but I assure you that there have been incidents in which the IRS felt they had a strong enough case against individual taxpayers that they pursued enforcement.

Didn’t the FASB change the rules several years ago to allow additional tax withholding?

The FASB’s authority is limited to US accounting principles. The FASB doesn’t have any authority to stipulate which tax withholding procedures are permissible; they can only stipulate how to account for transactions in which taxes are withheld.

The FASB did amend ASC 718 back in 2016 to allow shares to be withheld to cover tax payments up to the maximum individual tax rate without triggering liability treatment. But this doesn’t mean that you can do so without following the process prescribed in US tax regulations. Also, as noted in my article, there are still some accounting traps to be wary of when withholding additional taxes.

What are the penalties to the company for over withholding?

State laws govern the amounts companies are permitted to deduct from employee paychecks. When companies deduct monies for which they don’t have a legal obligation or basis, they could have a liability to employees under state laws.

In this situation, where the withholding is at the request of employees, it seems unlikely that employees would pursue claims against the company (or, if they did, that they would be successful in their pursuit).

My general take on this question is that occasionally accommodating a request for additional withholding without requiring the employee to submit a new Form W-4 is unlikely to result in any penalties to the company. A few transactions here or there aren’t likely to be uncovered during an audit and, even if they are discovered, it’s not clear that the company would be subject to penalty.

I am more concerned about companies systematically allowing all or most employees to circumvent the process for requesting additional withholding that is prescribed by the IRS. A systematic or automated process is likely to be noticed during an audit. My sense is that most tax audits involve some amount of negotiation between the company and the auditor. If nothing else, systematically circumventing the IRS’s prescribed process here might be the sort of thing that would annoy an IRS auditor and might make the auditor less willing to negotiate on other matters that are uncovered in the audit.

In addition, the more employees that you allow to request additional withholding, the greater the chances that one of them will figure out that this is a nifty way to avoid having sufficient taxes withheld on their regular pay. I don’t think it’s wise for the company to take on the risk of inadvertently helping employees commit tax fraud.

But isn’t it true that many/most companies allow employees to request additional tax withholding?

In the past three years, we have seen an increase in the percentage of companies that accommodate requests for additional withholding. I think this shift is attributable to a few recordkeeping platforms developing functionality to help companies manage these requests. But even with this shift in practices, the most recent NASPP/Deloitte survey indicates that only about half of companies accommodate these requests and most of them do so only for certain individuals or on an exception basis. 

• Just under half of respondents to the NASPP/Deloitte Tax 2025 Equity Administration Survey do not allow employees to request additional withholding in any circumstances.
• Those that allow employees to request additional withholding typically only allow it in limited circumstances.
• Only 7% allow all employees to request additional withholding and notify employees that they have this choice.

For more trends in tax withholding practices, check out the NASPP webinar "Equity Award Tax Withholding Trends and Best Practices."

What about outside directors? Can we withhold taxes for them upon request?

Nope, nope, and nope. That is a whole separate blog entry, see “Say No to Withholding Taxes for Outside Directors."