ShamelessFreeTaxAdviceFilter: Stock Option Tax Question (Quarterly Estimated Payments)
April 13, 2006 4:33 AM   Subscribe

Yes, I am going to try and find an accountant to answer this, but I figured I'd also ask the MetaFilter community... I sold some stock options (Incentive Stock Options) last year. Because they are ISOs, my company did not withhold anything, which I anticipated, so I put enough aside to handle my tax bill. So instead of getting a refund, I owe $7k. Not a problem. I entered the info into TurboTax, and it's telling me I need to do quarterly estimated payments. My question is this, because this was a one time hit and my company is already taking enough withholding from my paycheck, do I really need to make quarterly estimated payments?
posted by wisdom-seeker to Work & Money (8 answers total)
I am _so_ not an accountant, but...

The same thing happened to me one year. My wife had been working as an independent contractor, and we ended up owing money (about $7K, just like you).

Our accountant gave us these pre-printed quarterly estimated payment things as well. However, that tax year, my wife stopped working as much as a contractor (a new baby will do that), and so we knew that this year would be different.

We just ignored the forms, ignored the quarterly payments (though I did up my withholding a bit). We were fine.

So, no, I do not think that you should make the payments. Even if something in your tax situation had changed, all you would have to do is change your withholding.
posted by gregvr at 4:40 AM on April 13, 2006

I am a little confused as you say you owe $7k which implies you owe it now for 2005 yet the time for paying 2005 quarterly estimated payments is long passed.

In general with an ISO, if you exercise and sell on the same day the net proceeds are taxed as ordinary income. Your employer will not withhold the tax due on the transaction but will report it on your W2. Estimated quarterly tax payments are due on such a transaction, one time or not.

If you exercise and hold for more than one year there is no tax event upon exercise (that is the beauty of an ISO). When you sell you are taxed as long term capital gains and the basis in the stock is the strike price on your option. A quarterly estimated payment should be filed in the quarter in which you sell. ISO are not quite all they are cracked up to be because the exercise may not be taxable under ordinary taxes, but is a tax preference item under the alternative minimum tax (AMT). If it generates an AMT liability for you you need to file a quarterly estimated payment in the quarter in which you exercise.

Failing to make the required estimated payments can increase your taxes, mostly by interest. However, if your withholding over the course of the year is sufficient to meet the minimum required (I can not remember the exact number, something like 110% of last year's tax bill) then you don't need to file quarterly estimated payments. If you have just exercised then the strategy is to adjust your withholding to cover this amount.
posted by caddis at 4:53 AM on April 13, 2006

I think what happens is this: you're now on the hook for making quarterly tax payments for the next year. If you don't actually owe any tax, I don't think you have to send them in. However, if you DO end up owing tax, and you didn't make quarterly payments, you will owe a (fairly substantial) penalty.

You may want to increase your withholding enough this year to be absolutely certain you won't owe next year.

And do double-check with your accountant, please.
posted by Malor at 5:25 AM on April 13, 2006

caddis...Sorry, I re-read my post and it is kind of confusing. I did the same day sale in October of 2005. I am doing my 2005 taxes now and TurboTax is saying that I need to make the estimated payments for the 2006 year.

Thank you (and everyone else) for the input so far.
posted by wisdom-seeker at 6:02 AM on April 13, 2006

If your only income this year will be salary (with perhaps minor interest and dividends) then you should not need to file quarterly estimated payments for 2006, assuming you are having a sufficient amount withheld. I think turbotax does this when you owe a substantial tax for the prior year.
posted by caddis at 6:27 AM on April 13, 2006

caddis...Pretty much what I thought. In any case I am going to check with an accountant to make sure. I did exercise more options this year, but they were non-qualifying, and did have money withheld.
posted by wisdom-seeker at 7:01 AM on April 13, 2006


Similar thing happened to me this year...please be sure to give us the recommendation of the accountant
posted by batboy at 7:35 AM on April 13, 2006

caddis was dead-on with his response. Actually there were two issues here - which caddis was (I think) trying to tell me, but it was not sinking in because I was focused on only the first one.

Issue 1 is do I need to make quarterly estimated payments. In my case, no because my employer is deducting enough to more than pay my taxes. I was spooked because TurboTax printed out the vouchers as a result of the gain I got from from the sale with respect to what I had withheld.

Issue 2 is do I need to pay a penalty for under withholding. In my case, again the answer is no. You do not have to pay a penalty if you paid in an amount equal to 100% of your tax for the prior year, which I did. The CPA I talked with said that most all tax software will pick up on this and handle it properly.

Thank you again caddis, and everyone who reponded.

batboy, I would still double-check with a tax professional because your situation may be different than mine.
posted by wisdom-seeker at 12:08 PM on April 13, 2006

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