Estimated taxes for equity compensation: what you actually owe and when

Why equity events create an estimated tax problem

Most equity compensation is subject to IRS supplemental income withholding — a flat 22% on amounts up to $1 million, 37% above that.¹ The 22% rate is built for a median-income earner. If your total compensation puts the equity event in the 35% or 37% bracket, the gap between what gets withheld and what you actually owe can be enormous:

State tax adds another layer. California's top rate is 13.3% — and California does not withhold state tax on supplemental income at all unless you adjust your withholding elections separately. A $300K RSU settlement in California can produce a $40K–$50K total underpayment even before state tax.

The IRS charges an underpayment penalty on shortfalls not covered by withholding or timely quarterly payments. For 2026, the penalty rate is approximately 7% annualized (federal short-term rate + 3 percentage points; the IRS adjusts it quarterly).² At $50K underpaid, that is roughly $3,500/year — and it accrues from the date each quarterly payment was due, not from April filing.

The 2026 quarterly deadlines

The California zero-Q3 rule is the most common gotcha for tech employees. California uses a 30/40/0/30 installment schedule instead of the federal 25/25/25/25 structure.³ If you earn income in June, July, or August — including RSU settlements, tender proceeds, or option exercises — you owe federal estimated tax on September 15, but you owe nothing to California that day. Your California Q4 payment (January 15) covers that period instead. This means front-loading California into Q1 and Q2 is correct — but it also means some California employees overpay in Q3 by mistake or underpay California in Q1/Q2 by not accounting for the higher early installments.

How much to pay: the safe harbor calculation

The IRS offers two ways to avoid the underpayment penalty entirely. You need to satisfy one of them:²

1. 90% of current-year tax. Pay at least 90% of what you will actually owe for 2026 across withholding + estimated payments. This is the mathematically correct method, but it requires you to forecast your income — not always possible before a Q2 or Q3 equity event.
2. 100% of prior-year tax (110% if AGI > $150K). Pay total estimated payments equal to your 2025 total tax liability shown on your 2025 return. If your 2025 adjusted gross income exceeded $150,000, the threshold rises to 110% of 2025 tax. This method does not require forecasting — you just need your prior return. It is the safer option when you have unpredictable equity income.

Most equity-comp earners hit the $150K AGI threshold, so the practical safe harbor is 110% of prior-year tax. If your 2025 total tax was $80,000, you need to pay $88,000 across withholding and estimates for 2026 to avoid any penalty — regardless of how big 2026 turns out to be. You will still owe the balance at filing; you just will not be penalized for the underpayment.

Equity event by event type

RSU settlement at IPO (double-trigger)

When your RSUs settle at an IPO — the second trigger — your company withholds at the 22% supplemental rate on the share value at settlement. If that settlement is your largest income event of the year and pushes your total income above $256K, the gap is 13 percentage points on every dollar of settlement above that threshold. On a $500K settlement with a $250K salary, the federal withholding gap alone is roughly $50,000 — plus California (if applicable) withholds nothing on RSU income via supplemental withholding unless you have specifically adjusted your state DE-4 withholding form.

Use the RSU settlement tax estimator to model your specific settlement, bracket, and state. The output shows the Q3 recommended payment and the Q4 backup.

ISO exercise (no withholding — AMT risk)

ISO exercises are not subject to withholding at all — ISOs generate no W-2 income under regular tax rules. But the spread between strike price and FMV is an AMT preference item, and AMT is not withheld automatically. If you exercise ISOs with a large spread, you may owe substantial AMT — sometimes six figures — with no withholding offset. That AMT is due as quarterly estimated tax in the quarter you exercised.

Model the exposure first with the ISO/AMT calculator, then pay the AMT estimate no later than the quarter-end deadline for the quarter in which you exercised. For a June or July exercise, that means the September 15 Q3 payment.

NQSO exercise (withholding gap)

Like RSU settlements, NQSO exercises generate W-2 income and trigger 22% supplemental withholding. The gap calculation is identical to RSUs — if your total income puts the spread in the 35%–37% brackets, you will owe 13–15 percentage points more than was withheld, due the same quarter. See the NQSO tax guide for the full mechanics and a worked example.

Tender offer proceeds

If you tendered shares you already owned (bought or received as RSUs, after tax was already paid at settlement): gains are capital gains. No withholding occurs on capital gains distributions — you are responsible for making estimated payments entirely on your own. Long-term capital gains on shares held over a year are taxed at 0%, 15%, or 20% depending on income, plus 3.8% NIIT if your income exceeds $200K (single) / $250K (MFJ).⁴ The 20% rate applies above $533,400 (single) / $600,050 (MFJ) in 2026.⁵

If you tendered via a cashless exercise of options — exercise and sell in the same transaction — that spread is ordinary income, withheld at 22%, same gap issue as an NQSO exercise. Use the tender offer calculator to model net proceeds by instrument.

Lockup expiration sales

Once the lockup expires and you start selling post-IPO shares, each sale generates capital gains. If you are selling under a 10b5-1 plan in regular quarterly windows, you may have capital gain income in Q2, Q3, and Q4 of 2026 with no automatic withholding. The strategy: estimate your total expected sales for the year at the start of each quarter and make a corresponding estimated payment. The concentration glidepath calculator models multi-year after-tax proceeds — use it to size your annual capital gain exposure, then divide into quarterly payments.

Step-by-step: Q3 September 15 payment checklist

If you had an equity event between June 1 and now, here is how to calculate and submit your Q3 federal estimated payment:

1. Pull your 2025 Form 1040 (line 24). Multiply that number by 1.10 if your 2025 AGI exceeded $150,000. This is your total safe-harbor target for 2026.
2. Add up your 2026 withholding to date. Check your most recent pay stub (box 2 year-to-date) plus any supplemental withholding from RSU or option events. Your brokerage 1099 will show what was withheld on equity events if you used a same-day sale.
3. Subtract withholding from the safe-harbor target. The remainder is what you owe via quarterly estimates across all four quarters.
4. Allocate to Q3. If you are paying equally, divide by 4 and pay that amount by September 15. If you had a large event in Q2 or Q3, concentrate more of the estimate in Q2 or Q3 respectively — the per-quarter safe-harbor rule penalizes late payments even if you catch up later.
5. Pay via IRS Direct Pay or EFTPS. At IRS Direct Pay, select "Estimated Tax" and "2026." EFTPS is the electronic federal tax payment system — better for large or recurring payments. Both post same-day if submitted before 8 p.m. ET on the due date.
6. File California separately if needed. Remember: no California payment is due on September 15. Your California Q4 payment on January 15, 2027 will cover income from June–December. If you underpaid California Q1 or Q2, however, a penalty for those quarters may already be accruing — you cannot fix Q1/Q2 California underpayments with a late Q3 payment.
7. Document what you paid. Save the IRS confirmation number. At filing, you will enter estimated payments on Form 1040, line 26.

What about W-4 adjustment instead of 1040-ES?

Instead of writing estimated checks, you can increase your regular payroll withholding via a new W-4. Payroll withholding is treated as paid ratably throughout the year for penalty-avoidance purposes — meaning extra withholding deposited in December can retroactively cover an April shortfall. Estimated payments, by contrast, are locked to the quarter in which they were made.

If you had a June RSU settlement and the September 15 deadline is coming up, you can avoid Q3 and Q4 estimated payments by submitting a new W-4 and requesting enough additional withholding from your remaining paychecks to cover the gap. Ask payroll for the "additional withholding" line — it is line 4(c) on the current Form W-4. Divide the total gap by the number of remaining pay periods in 2026.

The downside: you give the IRS the money earlier than necessary. For large gaps ($50K+) where you want the float, making quarterly estimates at the actual deadlines is more cash-efficient.

The underpayment penalty in practice

The IRS underpayment penalty is calculated on a per-quarter basis at the federal short-term rate plus 3 percentage points — approximately 7% annualized for Q3 2026.² It is computed using Form 2210 when you file. The penalty is interest, not a flat fee — so a $30,000 Q3 shortfall for roughly 7 months (September 15 to April 15) costs approximately:

$30,000 × 7% × (7/12) ≈ $1,225

That is modest in dollar terms — but the penalty compounds if Q1, Q2, and Q3 are all short. A $30K shortfall across all three quarters could cost $2,500–$3,500 by filing time. More importantly, failing to make estimated payments often signals a cash-flow problem: if you do not have the money to make the estimated payment, you will not have it for April 15 either, and the IRS charges failure-to-pay penalties (0.5% per month) on top of the underpayment penalty on the remaining balance.

2026 rates at a glance

When to bring in an advisor

The estimated tax mechanics are straightforward. The hard part is knowing what income to forecast — especially when your company has a pending IPO, a tender window that may or may not open, or ISO exercises contingent on FMV. An equity-comp specialist can model your full 2026 income scenario, calculate the exact safe harbor amount, and build a quarterly payment schedule that keeps you compliant without overpaying. The Q3 September 15 deadline is close enough that this planning, if you have not done it, is urgent.

Have an equity event and an estimated tax question?

Get matched with a fee-only fiduciary advisor who specializes in equity compensation — withholding gap modeling, safe harbor calculations, and full estimated payment schedules. Free, no obligation.