Tax Center Global Tax Guide / Glossary / Discussion / About Us
Register Log In
myRecordsmyToolsmyClients
   NQSOs   
Basics   
Taxes   
Taxes Advanced   

Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.

NQSOs: Taxes Advanced

If I need to file an extension to complete my tax return after the IRS deadline, are there any mistakes I should avoid that involve stock grant income?

For most US taxpayers, the deadline for filing federal tax returns with the IRS for tax year 2017 is April 17, 2018. In any tax year, stock compensation income, such as from an NQSO exercise, an ISO or ESPP disqualifying disposition, or the vesting of restricted stock, can raise your income tax and make your return complex. For help, see a special section of this website called Reporting Company Stock Sales.

Note: The IRS routinely extends filing deadlines for people in zones affected by natural calamities, and you can look up these special provisions at its webpage on disaster relief. State tax authorities often provide similar extensions.

Postponements are available for US military personnel who are serving in combat zones. The filing deadline for military postponements is usually put back by 180 days from the time the taxpayer leaves the combat zone.

Filing An Extension

To gain an automatic six-month extension for the due date of your tax return (until mid-October), you can use IRS Form 4868, Application For Automatic Extension Of Time To File.

Alert: If you can file your tax return by the deadline but cannot pay all of your tax bill, do not file an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the remaining amount you owe. See another FAQ for information on arranging an installment plan with the IRS.

The extension applies only to the filing of your tax return. It does not apply to any tax you may owe, which you must pay by the original IRS filing deadline to avoid penalties. You must accurately estimate how much tax you need to pay. By paying 100% of your tax when you file the extension, you avoid interest and penalties.

Penalties

The safe harbor for avoiding a penalty for your extension is paying at least 90% of the total actual income tax. If you owe any taxes with the actual return that you file by the extension deadline, you owe interest on any underpayment going back to the original April due date. The IRS publishes the rates every quarter (see Internal Revenue Code Section 6621). If you end up paying more than 10% of your total tax with your actual return after the deadline, interest and penalties will apply. To avoid the failure-to-file penalty on what you owe, you must file the extension no later than the original deadline of your return.

Bear in mind that the penalty for failing to file is generally more costly than the penalty for failing to pay. The penalty for missing the initial filing due date or the extended deadline is 5% (4.5% for filing late and 0.5% for paying late) of the balance due for each month, or part of a month, up to a maximum of 25%. You can face a failure-to-pay charge of 0.5% a month on any unpaid taxes if you have not paid at least 90% with the extension. The IRS does not assess both penalties for the same period. The 0.5% penalty will also be assessed if you do not pay all of the tax due with the final tax return. If you lack the funds to pay your income tax, you may want to consider asking to pay by installments or working out an offer in compromise with the IRS (see a related FAQ), or even paying by credit card through special service providers (they charge a fee for a percentage of the payment).

Alert: The penalty for the failure to file a federal tax return within 60 days after the due date is either $205 or 100% of unpaid tax, whichever is lower.

Remember To File An Extension For Your State Return

Don't forget about your state tax return. For example, if you pay tax to the state of California and cannot file by the due date, you will need to complete and submit Form FTB 3519 to apply for an extension. As with your federal return, you will still need to pay at least 90% of any tax you owe by the original filing deadline.

Looking Ahead: Estimated Tax Payments

If you expect additional income from stock grants, and if your salary withholding and the withholding at the statutory rate for supplemental income will be inadequate to cover the taxes you will owe for the full year, consider making estimated tax payments (or see if you can adjust your salary withholding). To avoid any penalties on your tax return next year, be sure that over the upcoming year you pay the IRS either 90% of your expected tax bill or 100% of this year's taxes (for adjusted gross incomes over $150,000, it is 110%). The penalties are calculated on a quarterly basis, so you need to make estimated tax payments in the quarter that you have earned the income. If you are basing your estimated tax payments on your prior year's tax, then the estimated payments should be spread equally over the four quarters to avoid penalties.

The details of estimated taxes, including the due dates, are discussed in IRS Form 1040-ES and, elsewhere on this website, in the sections NQSOs, ISOs, Restricted Stock, and SARs.

Print this FAQ: Printer icon
Share this FAQ:
Share this article on LinkedIn Share this article on Facebook Share this article on twitter
Prior FAQ in list Return to list Next FAQ in list