The tax legislation that became law in December 2017 reduced the mandatory federal income tax withholding on certain types of compensation, including non-qualified stock options (NQSOs), restricted stock units (RSUs) and cash bonuses, from 25% to 22%.

If you’re a Nike, Inc. employee who own NQSOs – which have a vesting date approaching – the withholding rate reduction is a potential tax trap. Depending on your tax bracket, you may need to have more than 22% withheld to meet your federal tax liability.

Here is an example:

  • Base pay of $175,000
  • Annual bonus of $25,000
  • 2,000 options available to be sold at a strike price of $55 per share, sold at $75 per share (a gain of $20 per share, or $40,000 in total)

  • Your 2018 total income would be $240,000, assuming no 401(k) salary deferrals or other adjustments to income. Under the new tax law, a “married filing joint” couple receives a $24,000 standard deduction. Your taxable income is therefore $216,000, which for 2018 places you firmly in the 24% tax bracket. As a result, you will have withheld $1,300 too little for federal taxes. If your total income is over $315,000 the problem would be magnified, as the tax bracket is 32%, and your withholding would be $6,500 too little.

    While the new federal tax law is advantageous in many ways, you may need to review your withholdings to avoid an unanticipated tax liability. Don’t assume that just because an amount was withheld, it will fully satisfy your tax liability.

    Please consult your tax advisor with questions about stock options, bonuses and tax withholding.

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