In this episode of ThimbleberryU, we dig into why tax season can feel particularly overwhelming for tech professionals and how to approach it with less stress and more predictability. We focus on the common sources of tax complexity, equity compensation and bonuses, and offer a simple framework for making tax season less dramatic and, ideally, boring.
We start by exploring how tech income is rarely just a paycheck. When restricted stock units (RSUs), employee stock purchase plans (ESPPs), bonuses, or job changes are layered on top of a base salary, tax situations become more complex. These types of income show up in chunks and are taxed differently, often creating withholding gaps and surprises at filing time. Most payroll systems handle base salary well, but they may fall short when irregular income is involved.
We walk through how RSUs are taxed at vesting, and how withholding often underestimates what’s truly owed, especially for higher earners. ESPPs add another wrinkle: taxes are triggered when shares are sold, not purchased, and withholding is often absent entirely. And bonuses, while taxed as regular income, are frequently withheld at flat rates that don’t match the recipient’s tax bracket. This leads to confusion and contributes to the myth that bonuses are taxed more heavily.
Throughout the conversation, we emphasize that withholding is NOT the same as actual tax owed, and that tax visibility (not perfection) is the real goal. We suggest starting the year by forecasting equity and bonus income, applying a rough tax rate, and comparing that to projected withholdings. If there's a gap, it's not a problem; it’s a signal to adjust.
We share real client examples, showing how a lack of planning around year-end RSU vests led to surprise tax bills. A few proactive steps, like setting aside cash when equity vests or bonuses hit, can prevent financial strain. We encourage creating a running file of key documents, such as vesting summaries, pay stubs, and equity sale confirmations, to simplify reporting and planning.
Finally, we outline a system for turning tax planning into a repeatable habit: review compensation annually, capture documents in real time, run a mid-year check, and coordinate with financial and tax professionals before tax returns are finalized. The message is clear. Calm comes from process, not hope. With the right approach, taxes can feel manageable, even boring. And in this case, boring is a very good thing.
(00:00) – Intro: Why Tax Season Feels Overwhelming
(01:40) – The Hidden Complexity of Tech Income
(03:00) – Where Tax Risk Typically Shows Up
(04:00) – How RSUs and ESPPs Are Taxed
(07:00) – The Bonus Tax Withholding Myth
(09:00) – Estimating Tax Exposure (Visibility > Precision)
(10:26) – A Real-World Tax Surprise Story
(12:32) – Gathering Tax Documents Throughout the Year
(14:45) – Managing Cash Flow from Equity & Bonuses
(17:43) – Building a Repeatable Tax Planning System
(19:17) – Final Thoughts: Calm Comes from Process
Jon Gay (00:02):
Welcome back to ThimbleberryU. I'm Jon Jag Gay. Amy Walls from Thimbleberry Financial is with me as always. Hey, Amy.
Amy Walls (00:07):
Hey, Jag, it's great to be talking to you.
Jon Gay (00:09):
Always a pleasure to be with you. And a few months ago, we had the most wonderful time of the year. I think some folks will call this the least (chuckles) wonderful time of the year.
Amy Walls (00:17):
(Laughs) Tax time.
Jon Gay (00:19):
Yeah, tax season, especially for folks in tech. I know that's one of your specialties at Thimbleberry Financial. And specifically, today, we're going to focus on how equity compensation and bonuses can quietly turn April into a very stressful time of year if you're not thinking ahead.
Amy, we hear a lot of frustration around taxes from tech professionals that you work with every day. Why does it feel so overwhelming for this group in particular?
Amy Walls (00:41):
Jag, for many people in tech, income is layered. So, what many people are used to is they've got their salary coming in, that feels steady. But now, let's layer bonuses on top of that that may come at multiple times during the year and have different withholdings on them.
And let's add equity compensation in a couple of different forms, potentially on top of that. So, all of this income is coming in in different ways, different amounts throughout the year, and all with different tax rules. And so, when life is already busy, let's layer that on.
[Laughter]
And often, taxes become the thing you deal with later. Especially when this compensation is coming in, let me just focus on getting my job done so the compensation does continue to come in. And then suddenly, later is March or April, and “Uh-oh, I've got to get this handled.”
So, what we really want people to know is that tax season does not have to be drama-filled or stressful. With some upfront awareness and a really simple process, taxes can become much more predictable, and frankly, what we want is for them to become a little boring. Because that's a good thing. So, boring is the goal of this episode (chuckles).
Jon Gay (02:08):
Boring is the goal for your finances at the end of this episode. Boring is not the goal of the episode itself. Let me clarify that.
Amy Walls (02:14):
There we go. Correct, yes. Good correction.
Jon Gay (02:17):
(Laughs) So, let's zoom out to the big picture. When someone looks at their income for the year, where does tax risk usually show up beyond their regular paycheck?
Amy Walls (02:26):
Most payroll systems do a decent job withholding for base salary. Of course, that's also up to the employee and what they chose to have withheld. Let's just kind of assume that part is working as expected. So, tax risk shows up when income doesn't behave like a paycheck.
So, for tech professionals, that often includes RSU vesting, ESPP sales, performance bonuses, sign-on bonuses, or changing roles with the company midyear. All those things affect that. So, a helpful way to think about it is asking which income shows up in chunks or irregularly. That's where surprises tend to live.
Jon Gay (03:14):
That makes sense.
Amy Walls (03:15):
And so, once people separate steady income from this chunkier regular income, it becomes much easier to know where to focus attention.
Jon Gay (03:26):
And you're talking about these chunks. It's not that taxes are mysterious, it's just that some income will play by different rules when it comes to taxes.
Amy Walls (03:34):
Exactly, Jag. And once you can see that clearly, planning feels a lot more manageable (laughs).
Jon Gay (03:40):
Got it. So, we've zoomed out, let's zoom back in a little bit and get specific. Can you walk us through how RSUs (restricted stock units), ESPPs, employee stock-
Amy Walls (03:51):
Purchase plans.
Jon Gay (03:52):
Purchase plans, thank you. I was going to get my analogies right today — and bonuses (chuckles), all these are each typically taxed and where people tend to kind of get caught off guard.
Amy Walls (04:00):
Absolutely. So, with RSUs, the key moment that our listeners need to remember is vesting. The value of the shares on the vest date is treated as ordinary income and included typically on W-2. Now, we do have to think about single vesting and double vesting. And so, I don't want to get too complicated here because that's a whole episode in and of itself.
But when it is truly vested by whatever definition your RSUs vest by, that's when the income's going to hit your W-2. So, when that happens, employers usually withhold some tax, often by holding back shares.
So (and we've talked about this in prior episodes), if a hundred shares vested and they were a dollar a share, they're probably going to withhold about 22 of them for federal taxes. And that's done at a flat rate. So, I won't get into all those details.
But for many higher earners, that flat rate doesn't fully cover their actual tax bracket. So, when the other shares (so in my example of 22) are withheld, if I'm doing the math quickly in my head, that's 78 shares remaining to me.
When I eventually sell those, there may be capital gains or losses on each of those shares depending on what happened to the stock price after the vest date in between when I sold. So, there's a few moving parts in there, if you will.
Employee stock purchase plans (another form of equity comp) works differently. Taxes here usually happen when you sell the shares, not when you purchase them. So, now, we have different things we're needing to track.
So, tax treatment depends on how long you held the shares. And with an ESPP, there's also a discount involved on that stock in most cases. And there is often little or no withholding at all, which, especially when the people are new to ESPPs, can be a big surprise.
And then the third thing you asked about, Jag, was bonuses. So, those are taxed as ordinary income, much like your salary. But withholding is often done at a flat supplemental rate, if you will. And some of this can depend on did you get a single paycheck for your bonus or was your bonus paid out as part of salary.
Because when it's combined, what often happens is they look at that paycheck as if that is the gross amount you get paid every paycheck. So, if your bonus was an extra $50,000 in that paycheck, and let's say that your gross pay would've been $10,000, now that paycheck is being taxed as if you earned $60,000 on every single paycheck throughout the year.
It's not the case, but that's going to skew the rates. And it's the reason there's this myth that goes around that says that “Well, my bonuses are always taxed at this higher rate.” It's that all of your income on that paycheck is taxed at that higher rate because your income was so much higher.
Jon Gay (07:20):
That actually answers something I've always wondered about. That actually makes a lot of sense the way you're explaining it.
Amy Walls (07:25):
Good.
[Laughter]
I'm glad that landed.
Jon Gay (07:29):
So, I'd like to say withholding and what you actually owe in taxes are often quite different.
Amy Walls (07:36):
They are. It's actually a funny thing. We will ask clients like, “How much did you owe?” For example, a question may come up before we get someone's completed tax return back. And we don't prepare taxes, so we're waiting for those to come back, and we're going to look at it and use that to inform the financial plan and make tweaks.
But we may have a conversation where we're talking about how much do you owe in taxes or how much did you pay in taxes. And there are many times the question of how much do you pay in taxes? Someone answers, “Oh, I don't pay taxes. I get a refund.”
Jon Gay (08:17):
(Laughs) That's a dangerous thing to say (laughs).
Amy Walls (08:22):
So, there's the total amount you owe, there's the amount you paid through withholdings, there's the amount you paid through withholdings and maybe quarterly estimates. And then there's the amount you might owe or get back at the end of the year to balance against what you truly owed. It's messy (laughs).
Jon Gay (08:40):
Yeah, it is. That is such a – “Oh, I get a refund.” Well, yes, because you paid more than you owed. You still paid taxes. I think that's something people get tripped up on a lot. And this actually all leads nicely into our next question: how can someone get a sense of their tax exposure earlier in the year before we hit the “Ides of April,” so to speak?
Amy Walls (09:00):
Okay. So, I know we're talking to tech clients, and sometimes in there, we're getting some engineers. And so, this message is for those people listening that like precision or perhaps the people who love those people, that like precision.
Precision is not our goal when it comes to being prepared and having April be boring. The goal is visibility. A rough estimate is often more helpful than waiting for perfect numbers.
Jon Gay (09:34):
Wow, alright.
Amy Walls (09:36):
Okay. So, you want to start by listing expected equity income and bonuses for the year. Looking ahead and planning for that. Applying a reasonable estimated marginal tax rate that reflects where you likely are to be for federal and state taxes.
Then you can compare that estimate to what you expect will actually be withheld. So, if there's a gap, that's okay. There's not a problem. That gap is the useful information that gives you options.
Jon Gay (10:11):
I love that line about the goal not being precision. It's visibility. It's, “have an idea.” You don't have to wait for all the numbers to come in and have it down to the penny to get this figured out. You just want to know where you are.
Amy, do you have an example or a story you can tell us that maybe illustrates what we're talking about here today?
Amy Walls (10:26):
So, this has actually happened several times. A new client comes to us usually early in the year. Taxes aren't done for the prior year yet, and we're working on their planning. But through the information we're getting, we recognize, “Uh-oh, with all this cash they're sitting on, this is going to go to a tax bill for last year.”
And in that initial conversation, they are feeling like, “No, taxes are going to be covered. Everything was withheld.” But the problem is they had a large RSU vest at the end of the year and weren't prepared with the idea that much of that money would need to go to pay the tax bill because they also had smaller vests earlier in the year.
So, basically, not enough was coming out all year in smaller amounts, but they seemed on track. So, they weren't really worried about it, didn't have a lot of experience. But this large vest at the end of the year (and it was the first time it's happening) caused a big shortage in taxes withheld.
And we've been able to catch it and say, “Well, this much cash can't go to your goals because that's got to go to last year's taxes.” By finding that, obviously, they would've preferred to use it towards goals. And we would've loved to support that. But owing the IRS money also isn't a good thing.
[Laughter]
So, at least they weren't caught off guard the day before taxes were due with an email from their CPA saying, “Hey, you got to write a check for this much tomorrow.” They had some time to adjust.
Jon Gay (12:13):
For sure. That early awareness really does change the emotion of this whole experience.
Amy Walls (12:17):
Exactly. Calm and predictable, instead of stressful.
Jon Gay (12:21):
So, with that in mind, let's talk about preparation. What information should people be gathering during the year so tax time (chuckles) doesn't feel like a scavenger hunt.
Amy Walls (12:32):
I'm kind of still in favor of it being a scavenger hunt just with a quick checklist. Or if you're really good as things come up, yes, to have a file, you just tuck these things away in. At each RSU vest, keep the vesting information that shows the dates, share counts, and fair market value of what vested.
Probably along with the pay stubs that show what was withheld. It's not necessary for your accountant probably, but it will be helpful if you start to work with a financial advisor who wants to compare and tell you are you on track or not. Do we have a problem?
Jon Gay (13:11):
And it's a general rule. Better to have too much documentation than not enough.
Amy Walls (13:15):
Absolutely. For employee stock purchase plan sales, save the purchase confirmations and sale confirmations. And let me just address why I said I'm kind of for the scavenger hunt. For RSUs and ESPPs, for all of our clients, there's a quick, easy portal or two portals that employers give them where they can log in and find this information very easily.
And so, it can feel like an overwhelming list, but there's probably one or two spots they need to go to actually print the statements. So, once you understand that it's not as big of a deal of “I have to pull what?” (laughs).
Jon Gay (13:53):
It's a beginner-level scavenger hunt.
Amy Walls (13:55):
It is, yes. You want to hold onto bonus pay stubs that show gross income and withholding. That's a good thing to have. Year-end brokerage statements and employer equity summaries are also helpful. And collecting these as you go can help reduce errors. It can help reduce stress. So, I think whichever way works for you is great.
The other thing is, while you may give this to your CPA, and your CPA may say, “Why do I have all of this?” Like you said, it's better to have too much than too little. And there are situations where (especially with RSUs) we've seen that the CPA needs to recalculate the basis of the RSUs, and if they just go off of the tax documents, it won't be correct because of the withholding and such.
Jon Gay (14:45):
Let me change topics here a little bit on you here, Amy. Cash flow seems to be another big source of stress. When equity vests, when a bonus hits, what should people be doing right away when that happens?
Amy Walls (14:56):
Interesting question, Jag. A helpful mindset shift is to remember that equity and bonuses are partially tax obligations the moment they arrive. So, setting aside money for taxes immediately can make an enormous difference later.
So, let's say that I'm being good about what I'm eating. And very aware, we're recording this in in early January, and we know that New Year's resolutions are still in play for another couple weeks.
Jon Gay (15:30):
The gyms will thin out soon. It's okay.
Amy Walls (15:32):
What that might mean is that when I go to a restaurant, I immediately ask for a box to put half my food away. That might be a strategy I use. Same thing when this cash comes in from RSUs and bonuses, setting aside a certain percentage.
Sometimes with clients we are helping them figure out what that percentage needs to be. And sometimes we have other mechanisms that fit a client better to say, “Let's just kind of set this aside, and we'll carve it off periodically after we've figured out ballparks.” So, that money that is set aside should be liquid, and it should be boring.
Jon Gay (16:12):
(Chuckles). Again, back to boring.
Amy Walls (16:13):
A money market account; it's a great place to put that. A high-yield savings account is a great place to put that. I would say a money market fund is not a great place to put it because it's not FDIC insured. And I'm not trying to give blanket advice here. That's the last thing I want to do.
But boring is FDIC insured. And we need to understand that just like I said, this isn't about precision. This is also not about earnings return when we're covering taxes. So, liquidity here essentially matters more than performance when it comes to the tax reserves versus the cash reserves.
Jon Gay (16:56):
That makes sense. Okay.
Amy Walls (16:58):
I guess another thing I could say is by building that habit, someone reduces the chance of having to sell stock at an inconvenient time as a way of scrambling for cash.
Jon Gay (17:11):
Goes back to the emotion we talked about in our last episode.
Amy Walls (17:14):
Yep. So, we want to reduce anxiety. We want these bills to be boring (laughs).
Jon Gay (17:22):
So, really, more than anything else here, we're talking about the word “boring,” but you're actually buying yourself peace of mind.
Amy Walls (17:28):
Absolutely. And I'll take that boredom every day.
[Laughter]
Jon Gay (17:33):
Alright, let's zoom back up before we wrap up here, Amy. How can someone turn all of this into a simple, repeatable system instead of a yearly fire drill, or scavenger hunt, if you prefer?
Amy Walls (17:43):
(Laughs) Start with an annual review of how your compensation works and what is coming during the year. So, what's steady, what's chunky? And then focus more on what's chunky is really where we're going to be.
Capture documents around that chunky income as events happen rather than trying to recreate them later unless you very easily know these are my portals where I grab this stuff. Do a mid-year tax check. I think this is a great thing to see if anything has changed or grown.
So, you had an estimate of what things look like mid-year, take a look. Did it align? Maybe your employer's stock doubled in price, and all of these RSUs now are paying out a lot more than when you did your estimates. So, that's why we want to do that.
And then coordinate with your tax professional and your financial planner before your return is finalized rather than after. And understand that (this goes back to that we're not looking for precision) adjustments like estimated payments and withholding changes are tools.
Just because you need to do them, you didn't fail. It just means something changed, and so, we need to use a slightly different tool in order to get there. And last thing I'd say, Jag, is calm comes from process, not from hoping everything will work out.
Jon Gay (19:04):
I like that. So, if I'm hearing you right here, Amy, the big takeaway is that equity and bonuses, they don't have to make tax season stressful or the least wonderful time of the year (as I said at the beginning) if you approach them intentionally throughout the year.
Amy Walls (19:17):
That's exactly right, Jag. When you anticipate what's coming, you prepare early and build a simple system, taxes stop feeling like a personal attack or a bad mental health day.
[Laughter]
They just become a part of your financial life that you understand and can manage calmly. And when tax season feels boring, you're doing something right.
Jon Gay (19:42):
Again, the goal is for your tax prep to be boring, not this podcast.
Amy, if somebody wants to reach you at Thimbleberry Financial, how do they best find you?
Amy Walls (19:51):
They can find us online at thimbleberryfinancial.com, or by giving us a call at (503) 610-6510.
Jon Gay (19:59):
Always a pleasure, Amy. We'll talk soon.
Amy Walls (20:01):
Sounds great, Jag. Look forward to it.
[Music playing]
Voiceover (20:04):
Securities offered through registered representatives of Cambridge Investment Research Inc., a broker-dealer, member of FINRA SIPC. Advisory services through Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.
Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions.
Securities offered through registered representatives of Cambridge Investment Research Inc., a broker-dealer, member of FINRA SIPC. Advisory services through Cambridge Investment Research Advisors Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.