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This week we are staying on the topic of Underpayment Tax Penalties and how Walmart and Sam's Club leaders can avoid them. This is important as these avoidable penalties can range from hundreds to several thousand dollars.
Let’s look at a case study where Stephanie, a Walmart VP, saved $5,000 in underpayment penalties through effective tax planning.
Disclaimer: This illustration highlights the basic concept of underpayment penalties and how to manage them. The tax code can be tedious, and I’ve simplified some elements for clarity. Please note that this is for educational purposes only. For personalized advice, consult a tax or financial professional.
Stephanie's Situation
Stephanie, a VP at Walmart, faced her first underpayment penalty last year and wants to avoid it this year. Here are her financial details:
Base Salary: $350,000.
MIP: $200,000 (paid in Q1)
PSUs: $600,000 (paid in Q1)
RSUs: $200,000
Withholding Rate: MIP, PSUs and RSUs at 22%
Marginal Tax Bracket: 37%
Filing Status: Married, no other income
To avoid penalties, Stephanie needs to pay in at least 90% of her total tax bill for 2024.
Scenario 1: Do Nothing
If Stephanie opts to do nothing, she faces a $5,138 underpayment penalty.
RED - Stephanie must pay at least 90% of her estimated 2024 tax bill of $424,722, which is $382,250.
GREEN - This amount should be paid in quarterly installments of $95,562, but her payroll withholding is only $69,872 per quarter, leaving an underpayment of $25,690 each quarter.
BLUE - The IRS charges interest on this underpayment, resulting in a total penalty of $5,138 at an 8% annual interest rate for 2024.
Scenario 2: Allocate MIP and PSU Withholding to Q1
To lower the underpayment penalty, Stephanie can allocate her MIP and PSU withholdings to Q1, informing the IRS that more was withheld earlier in the year. For Walmart and Sam's Club leaders, MIP and PSU payouts typically occur in Q1, resulting in the full 22% withholding being paid at that time.
Even without making additional payments, this allocation adjustment reduces the underpayment penalty to $2,717 by minimizing the duration for which interest is charged on the underpayment.
RED - Since MIP and PSUs are paid in Q1, Stephanie can report a higher withholding payment to the IRS for that period.
GREEN - Instead of underpaying, she applies all withholding from the PSUs and MIP, resulting in an overpayment of $106,310, which is applied to Q2 and Q3.
BLUE - By front-loading her withholding, Stephanie isn’t technically under-withholding until Q3, at which point the IRS starts charging interest. This shorter interest period results in a ~$2,400 reduction in her underpayment fee, despite paying the same total amount over the year.
Note: Stephanie did not contribute to the Walmart DCMP. If she had contributed 100% of her MIP, it would lower the required withholding (helpful), but she wouldn't be able to allocate that MIP withholding since it was not actually withheld. She could still allocate the PSU withholding.
Scenario 3: Make Quarterly Payments
While allocating withholding to Q1 defers the need for additional payments, Stephanie still needs to contribute a total of $382,250 to avoid penalties. To eliminate the penalty entirely, she will make a $35,000 payment in Q3 and a $68,000 payment in Q4. This brings her total withholding to $382,488, slightly above the 90% requirement.
RED - Allocating the withholding from the PSUs and MIP covers Q1, Q2, and part of Q3, but Stephanie must still make quarterly payments to avoid penalties. She will pay $35,000 in Q3 and $68,000 in Q4.
GREEN - By meeting her withholding requirements for all four quarters, Stephanie avoids any underpayment penalties.
How Taurus Financial Planning Can Help
At Taurus Financial Planning, helping Walmart and Sam's Club Leaders assess whether to make quarterly payments, how much to pay and when to make those payments is part of our service. If you'd like some guidance on this topic, please grab some time on my calendar. I'm happy to help!
Thanks for reading,
Mark Chisenhall, CFA, MBA
Taurus Financial Planning
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.
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