How Walmart Leaders Can Avoid the Tax Underpayment Penalty

With the deadline for 3rd Quarter estimated tax payments having recently passed, it's a great time to review how Walmart and Sam's Club Leaders can avoid tax underpayment penalties.

By the end of this article, you'll understand whether you need to make a 4th Quarter estimated payment this year and how to eliminate underpayment penalties in 2025 and beyond.

This article covers:

1. Why Walmart Leaders often face underpayment penalties.

2. How to determine if your payroll withholding is insufficient.

3. What you can do to minimize or eliminate the underpayment penalty.

Taurus Financial Planning offers personalized guidance on when and how much to pay the IRS throughout the year in order to avoid tax penalties. If you're interested in a free consultation or exploring whether working with a financial planner is right for you, schedule a time on my calendar below:

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Why are Tax Underpayment Penalties Common for WMT Leaders?

Walmart typically withholds taxes on Supplemental Income at a rate of 22%. This rate is significantly lower than the 32% to 37% marginal tax rate that most Senior Directors and Officers face. Supplemental Income includes your MIP, RSUs, and PSUs, which becomes a larger portion of your compensation as your career advances.

For instance, if you are in the 37% marginal tax bracket and receive $500,000 from your MIP and equity compensation, your tax liability would be $185,000 ($500,000 37%). However, with the 22% withholding rate, only $110,000 ($500,000 22%) is withheld. This discrepancy could result in a penalty of approximately $3,000, depending on interest rates and other factors.

Will You Face a Tax Underpayment Penalty?

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

• 90% of the tax to be shown on your 2024 tax return, or

• 110% of the tax shown on your 2023 tax return.

As a general rule, if you received substantial income from your MIP, RSUs, and PSUs, you will likely not meet the 90% requirement for the current year and you'll need to be pro-active to avoid the penalty.

In some cases, if your income has increased significantly from the previous year, you may meet the 110% requirement and avoid a penalty for this year. However, be prepared for a potentially large tax liability in April and the need to make quarterly payments the following year.

How to Avoid the Tax Underpayment Penalty?

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

1.) Make Quarterly Tax Payments: The IRS allows you to make estimated tax payments at any time. The process is straightforward, but ensure you accurately report these payments when filing your tax return.

2.) Allocate Withholding from MIP and Equity Compensation: The IRS assumes that payroll withholdings are distributed evenly throughout the year. However, this isn't always the case for many Walmart Leaders, who often receive a substantial portion of their Supplemental Income earlier in the year. Since payroll taxes are withheld from this income, you can report on your tax return that these payments were made earlier. While this won’t change the total amount you owe, it can reduce the duration for which the IRS charges interest.

3.) Increase Payroll Withholding: You can request that Walmart increase withholding from your base salary and/or Supplemental Income to better align with your actual tax liability.

How Taurus Financial Planning Can Help You

Running tax projections and providing clients guidance on how to avoid underpayment penalties is part of the firm's offering. If you want help determining if you need to make a 4th Quarter Payment in 2024 or want guidance on a plan for 2025, please schedule some time on my calendar. I'm happy to help!

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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.

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.