Avoid Tax Surprises: Why High Earners Need Proactive Planning for Bonuses and Equity Compensation

You’ve worked hard to earn that bonus, those RSUs, or that commission check. These rewards often feel like the payoff for years of effort and strategic career moves. 

But when tax season rolls around, many high-income professionals are blindsided by an unexpected bill. Why? Because the IRS treats supplemental income differently than your regular paycheck—and that difference can cost you thousands if you’re not prepared. 

For executives and high earners, this isn’t just a minor inconvenience. It can disrupt cash flow, derail savings goals, and create unnecessary stress.  

The good news? With proactive planning, you can avoid the surprise and keep your financial life aligned with your goals. 

What Counts as Supplemental Income? 

The IRS classifies certain types of income as supplemental, not wages. Common examples include: 

• Annual bonuses 

• Commissions 

• Severance packages 

• Restricted Stock Unit (RSU) vestings 

These payments often come in separate checks from your base salary, and here’s the kicker: they’re subject to a flat withholding rate of 22%, regardless of your actual tax bracket.  

Some companies tier this upward for very large payouts, but they can’t withhold less than 22%. 

Why High Earners Are at Risk 

If you’re an executive or a professional with equity compensation, your marginal tax rate could be 35% or 37%. But your supplemental income is only withheld at 22%. That gap means you’ll likely owe additional taxes when you file. 

Let’s look at an example:  

Imagine you receive a $100,000 bonus in December: 

• Withheld at 22%: $22,000 

• Actual tax liability at 37%: $37,000 

• Surprise bill in April: $15,000 

Now layer in RSU vestings throughout the year—each taxed at 22%—and the shortfall grows quickly. For many executives, this mismatch can lead to a five-figure tax bill they didn’t anticipate. 

Equity Compensation Adds Complexity 

RSUs and performance shares vesting throughout the year can compound the issue. Each vesting event is treated as supplemental income, taxed at 22%, even if your overall income puts you in the highest bracket. Without proactive planning, these events can create a snowball effect of underpayment. 

Consider this example: You have $250,000 worth of RSUs vest in March and another $250,000 in September.  

That’s $500,000 taxed at 22% withholding ($110,000), but your actual liability at 37% is $185,000.  

That’s a $75,000 gap—before we even factor in bonuses or other supplemental income. 

The Ripple Effect 

This isn’t just about writing a bigger check in April. Underpayment can trigger IRS penalties, impact your ability to fund other goals, and create stress during a time when you should feel confident about your financial plan. For executives juggling complex compensation packages, the stakes are even higher. 

The Solution: Proactive Tax Planning 

At Plancorp, we believe tax planning shouldn’t be reactive—it should be integrated into your overall financial strategy. Here’s how we help clients avoid surprises: 

1. Estimate Your True Tax Liability

We project your income, bonuses, and equity vesting to calculate what you’ll actually owe. This includes modeling different scenarios so you can make informed decisions about timing and cash flow.

2. Adjust Withholding or Make Estimated Payments

Don’t wait until April. We help you plan quarterly tax payments so you’re never caught off guard. This proactive approach can save you from penalties and keep your financial life running smoothly.

3. Integrate Tax Strategy with Your Financial Plan

From RSU timing to charitable giving strategies, we align every decision with your goals and values. For example, if you’re planning a large charitable gift, we can coordinate that with your bonus payout to maximize deductions. 

Action Steps: What to Do Before Year-End 

If you’re nearing year-end and haven’t done proactive tax planning, don’t panic—there’s still time to get ahead of the curve. Here’s what you can do now to avoid a nasty surprise when you file:

1. Take Stock of What’s Coming

Start by reviewing your compensation calendar. Do you have a bonus hitting in December? RSUs vesting before year-end? These events can significantly impact your tax liability. Knowing what’s on the horizon is the first step toward controlling the outcome.

2. Run the Numbers

Don’t assume the 22% withholding is enough. For high earners, it rarely is. Pull together your year-to-date income and estimate your total taxable income, including supplemental payouts. This exercise often reveals a gap that needs attention.

3. Make a Quick Adjustment

If you’re short on time, consider making an estimated tax payment before December 31. This can help reduce penalties and soften the blow in April. Even a partial payment can make a big difference.

4. Explore Strategic Moves

Year-end is a great time to leverage tax-smart strategies. Could a charitable gift offset some of your supplemental income? Would accelerating a planned contribution to a donor-advised fund help? These moves can reduce your taxable income and align with your broader goals. 

Final Thoughts 

Don’t let tax surprises derail your financial confidence. If you’re an executive or high earner with equity compensation, now is the time to plan ahead. 

Schedule a 30-minute call with a Plancorp wealth advisor today and see how proactive tax planning can help you avoid costly mistakes and keep your wealth working for you.