Eye on Supplement Income to Avoid Tax Surprise

As a single parent, Maggie has enjoyed knowing her equity compensation has been growing as her team has hit performance targets. There was little to do with her Performance Shares and Restricted Stock Units until they cliff-vested last year. Out of sight, out of mind. Then her CPA notified her of the tax shortfall above the company’s tax withholding. Maggie is scrambling to cover her tax bill on vested shares. She has been fine day to day, but the unplanned tax bill was an unwelcome surprise. And what about planning for the future of educating three children and fulfilling her own dreams?

Maggie is emerging from the divorce with a new sense of clarity. She’s getting used to terms like solo, single and head of household. There’s no doubt her two daughters, 19 and 15, and her 17-year old son, follow her lead on facing the future; she intends to provide them with stability at home and support for their plans and dreams.

As Director of Customer Experience for a chain of drug stores, Maggie has been a high performer at work and a devoted parent at home. At age 45, she has been pulled in a lot of directions as she worked through the divorce while keeping everything calm at home.

She hasn’t had time to focus on her own dreams amid the chaos of transition. She has a few more things to get squared away; under long-term goals, she has filed her own interests in fitness, finances and a social life. She always enjoyed outdoor activities – hiking and biking, in particular – which have fallen away as single parenting has taken more time.

Everyone is just fine, she muses gratefully before falling asleep. Then worries about her future sneak in. The kids’ college expenses will peak in three years. Their 529 plans are too meager to cover four years. And, will George be accountable to funding 75% of college costs, as he promised?

George signed over the house in the 2017 divorce, which she and the children requested. In exchange, he kept full rights to his retirement assets. In her own 401(k), she has salted away $300,000. And in company stock, her position is valued at $500,000.

She is doing well financially…for now. She has been well rewarded for her team’s accomplishments in improving the company’s customer experience metrics. In fact, 2018 was a banner year for supplemental compensation, because of cliff vesting of her Performance Stock Units (PSUs) and Restricted Stock Units (RSUs).

On her supplemental compensation of $400,000, the company withheld 22%. Companies are required to withhold 22% of supplemental income up to $1M, even though her marginal rate is higher. Her CPA tells her that she is subject to a marginal tax rate of 37% on her supplemental compensation, and will need to raise cash for the difference. She hadn’t reserved to cover a tax shortfall of $52,000 this year from her annual salary of $250,000.

That’s when it hit her; she is living day to day with a certain amount of chaos. What she needs is the security of a life well planned. Getting control of her finances, thinking about her own well-being and getting her joy back are top priority. She met with an SFG financial advisor who listened and took her lead as she explored the life she envisioned.

Maggie's SFG team was knowledgeable about equity compensation and tax and spoke of how other executives manage their financial lives. Maggie found their suggestions very practical, including the one about finding time for herself, even suggesting she join a Saturday women’s hiking and biking group in the area. Maggie is on her way to delegating some of her financial activities so she can be confident her future is secure and she can enjoy the present.

*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

Executive Compensation, Performance Stock Units, Restricted Stock Units, Retirement Planning

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