Quarterly Estimated Taxes: How High-Income Earners Avoid April Surprises

Quarterly Estimated Taxes: How High-Income Earners Avoid April Surprises

By Robinson Mertilus, CFP®

For high income W-2 earners, it’s never fun to be surprised by a big tax bill in April after paying in throughout the year. We find that this is especially common among physicians, engineers, tech professionals and other high-income W-2 earners with variable income due to bonuses, RSUs / stock compensation, consulting income, and spouse’s separate income.

Why Withholding Alone Often Fails

Payroll withholding works well when income is stable, predictable, and earned evenly throughout the year. For many high‑income households, however, that is not the case.

There are four main components to the standard payroll withholding: (1) federal income tax, (2) social security tax (FICA), (3) Medicare tax (FICA), and (4) state and local income tax, if applicable. Employees complete a Form W-4 that tells the employer their filing status, whether there are multiple jobs or spouse also working, how many dependents, and their desired additional withholdings. There are similar forms for employees subject to state income tax.

When it comes to social security and Medicare tax (FICA), those are statutorily determined and are less likely to create any issues unless an employee changes jobs during the year as total wages aren’t coordinated across employers. For 2026, Social Security tax applies only to the first $184,500 of wages, after which Social Security withholding stops for the remainder of the year, even though Medicare tax continues to apply to all earnings with no cap.¹   High earners, however, may also be impacted by the Additional Medicare Tax, which requires an extra 0.9% to be withheld on wages above $200,000. In a situation where someone changes jobs, there may or may not be a proper application of the Additional Medicare Tax for their overall income picture, but that is reconciled when they file their tax returns.

Federal tax withholding is often the biggest culprit for the April surprises. Withholding alone often fails due to supplemental income taxed differently, RSU vesting withholdings not aligned with your actual marginal tax rate, stock option exercises or spousal earnings that are not fully captured by standard payroll withholdings.

These types of income require more intentional planning. RSUs and bonuses, for example, are typically subject to a flat 22% federal withholding rate. While that rate may feel high at the time, it often differs materially from the employee’s true marginal tax rate and is reconciled when the annual tax return is filed. For many high earners, marginal rates may be 32%, 35%, or even 37%.

Similarly, for non-qualified stock options, the most common type of stock option at many companies, employers would likewise withhold at the supplemental wage rate (22%) resulting in an underpayment that becomes due at filing.

Spousal income causes April tax surprises because each employer withholds taxes in a vacuum, while the IRS taxes the household as a single combined income when you file jointly. When you file jointly, Spouse A’s income stacks on top of Spouse B’s income, potentially pushing you into higher marginal brackets. It could be that enough tax was withheld for two individuals, but not enough for a high-earning household.

The examples above assume there is some level of tax withholding, but in certain cases, such as consulting income, there may be no withholding at all even though taxes are still owed. This further complicates the eventual tax picture as the income may be highly variable, resulting in taxes due at tax time.

How Estimated Taxes Could Help Solve This Problem

When taxes aren’t fully covered through payroll withholding, you can make estimated tax payments directly to the IRS (and state, where applicable). Most taxpayers follow a quarterly schedule established by the IRS, which divides the year into four payment periods: April 15^th, June 15^th, September 15^th, and January 15^th (of the following year).²

If the taxes will ultimately be owed and the cash is available, it’s natural to ask why not simply wait until tax time to settle up. This can be especially tempting when excess cash is earning interest in a high‑yield savings account or invested in the market. However, the IRS operates on a pay-as-you-go system where taxes are expected to be paid as income is earned, not months later when you file.³  Waiting can result in underpayment penalties and interest that often outweigh the benefits of holding onto the cash, even when it’s earning a return.

In general, most taxpayers can avoid underpayment penalties by meeting one of the IRS safe harbor thresholds: paying at least 90% of the current year’s tax liability, or 100% of the tax shown on the prior year’s return, whichever is smaller. For higher‑income households, this prior‑year safe harbor increases to 110% if adjusted gross income exceeded $150,000 in the prior year. Accomplishing this requires thoughtful projection of annual income, an understanding of how much tax is expected to be withheld throughout the year, and a review of the prior year’s return.

Another alternative that often falls short is updating Form W-4.⁴  The W-4 was designed to approximate the tax liability on regular, predictable wages, not variable income like in the case of high-income households. A shortfall in tax payments for variable income often isn’t known in time or in a precise dollar amount, forcing reactive W‑4 changes throughout the year and again at the beginning of the following year to account for income variability.

Estimated tax payments are often the most effective way to close the gap left by payroll withholding and avoid unpleasant surprises at tax time. Because the right approach depends on income mix, timing, and overall financial strategy.

Making these decisions proactively and in coordination with a trusted financial advisor can help reduce the risk of underpayment penalties and help with planning cash flow. A financial advisor can also help assess estimated payments as circumstances change. A large bonus payment, for example, may not be known until just before the payout occurs so the tax impact may require a tax projection that considers overall income, potential bracket movement, and the interaction with prior estimated payments.

Robinson Mertilus, Wealth Manager

Sources:

1. https://www.ssa.gov/OACT/COLA/cbb.html
2. https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2
3. https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty
4. https://www.irs.gov/forms-pubs/about-form-w-4

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