About that MD tax bill
If you’re a managing director at Accenture, you probably sent in a large payment for your federal taxes ahead of yesterday’s deadline. If you’ve been an MD for a few years, you might have expected it, but I’d venture to guess new MDs were quite surprised.
In fact, if 2021 was the year you received your vested new MD grant, you were probably blown away (keep this in mind if you receive your new MD grant in 2022!).
There are a couple of factors that lead to this large bill that I’ll break down for you and strategies to manage through them.
What’s causing the big tax bill?
As your income increases at Accenture, you move into higher marginal tax brackets, which increases your effective tax rate. Let’s say you went from $350k in taxable income to $450k taxable income, pushing you into the 32% marginal tax bracket and increasing your effective tax rate from 20% to 24%.
Your previous $350k taxable income meant federal taxes of approximately $70k, whereas your higher taxable income and rate jumps your taxes to $108k!
Ideally, your paycheck withholdings increase at the same rate as your income, unfortunately, another factor for Accenture MDs likely means your withholdings increases aren’t enough.
Bonus and RSU income taxes
The main cause for a large tax bill is how Accenture withholds on your bonuses and vesting RSUs. Many companies will continue to tax this extra income at the same rate as your salary, but Accenture withholds taxes based on the “Federal Supplemental Income tax rate” of 22%.
In the example above, which puts you in the 24% effective tax rate, you’re already under-withheld by 2% on all bonuses and RSU income. This might not be very much in your first couple of years as an MD, but as your equity awards and VEIP RSUs begin to vest, this creates a bigger problem.
How to manage under-withheld taxes
We’re always looking for a silver bullet to reduce taxes, but if you want to stay legal (and who doesn’t!), there aren’t many options to lower taxable income.
You can reduce the amount of income by contributing to your traditional 401k or utilizing an HSA. You can also increase your deductions through mortgage interest, charitable giving, and other means. However, this usually only makes a minor dent, especially as your income increases into the higher six digits or low seven digits.
If we know we’ve maxed out our opportunities to lower taxes, then it’s of paramount importance to plan for the pain of a large tax bill. You can increase your paycheck withholdings, pay quarterly tax payments directly to the IRS, or wait until your taxes are due each year and pay the penalty for underpayment.
The last thing you want to do is wait until the hefty tax bill comes and be forced into selling stock at suppressed prices to cover it. This can also compound issues caused by not being able to claim a loss on the sale of stock if you use the VEIP or not optimizing capital gains.
There is no doubt, your job is complicated, and if you haven’t started outsourcing taxes and financial planning, now might be the time.
One of the main reasons I include tax preparation with my services is to help manage these pitfalls and save my clients time and frustration. We work together directly with our CPA to optimize taxes as much as possible and forecast taxes due.
Interested in learning more about I save clients time through strategic outsourcing of the stuff you don’t have time to think about but determine if you can retire early? Schedule a time to discuss further with me here.
