Executive tax planning is mostly about when your pay is taxed, and whether enough tax is withheld on it.
Bonuses and RSU income are wages, taxed at federal rates of up to 37% for 2026. Your employer may still withhold only 22% on them, and the gap comes due with your return.
Updated · Sources
Executive pay, federal rules for 2026
- Dec. 31
- is the usual last day to elect to defer salary or a bonus for work you do next year, under Section 409A.
- $1M
- of supplemental wages in a calendar year is where your employer must start withholding 37%.
- 3x
- your base amount is where change-in-control pay starts to carry a 20% excise tax.
The One Big Beautiful Bill Act (P.L. 119-21) made the individual tax rates permanent, so the 22% and 37% withholding rates stay. The $1 million line is not indexed for inflation.
Can you defer next year’s pay?
Section 409A sets the rules for nonqualified deferred compensation. If your plan meets them, income tax on deferred pay usually waits until you are paid. Four of the rules govern your own elections and payouts.
You elect before you earn the pay
For salary and an annual bonus, the election is due by the end of the year before you do the work. When you first become eligible for a plan of this type, you get 30 days to elect. That election covers only work done after it. For performance pay over at least 12 months, a plan can allow elections until six months before the period ends. The amount must still be uncertain when you elect.
The plan pays only on set events
A plan can pay you only on a date or schedule set when you deferred, or on one of five events. The events are separation from service (leaving the company), disability, death, a change in control and an unforeseeable emergency. Neither you nor the company can bring a payment forward, outside a few exceptions in the regulations.
Public company key employees wait six months
If you are a specified employee, meaning a key employee of a public company, pay due on leaving waits six months after you go. It can be paid sooner only on your death.
A later change adds five years
You can push a payment back, but the new election takes effect only after 12 months. It must delay the payment by at least five years, unless the payment is for death, disability or an emergency. For a payment on a fixed date, you must make the change at least 12 months before that date.
If a plan fails Section 409A, your vested deferrals under it for this year and earlier years become taxable at once, unless already taxed. You also owe an extra 20% of that amount. Interest is added at the IRS underpayment rate plus one percentage point, as if the pay had been taxed when deferred or vested.
A $700,000 bonus can still leave $60,000 to pay at filing.
RSU income counts as supplemental wages too, so your vests use up part of the $1 million before a bonus arrives.
Tax on the bonus
$259,000
All of the bonus is taxed at 37%.
Withheld at 22%
$88,000
That is 22% of the first $400,000, if your employer uses the flat rate.
Withheld at 37%
$111,000
That is 37% of the $300,000 that takes your year past $1 million.
Left to pay
$60,000
You owe this at filing, unless more withholding or estimated payments cover it first.
These are 2026 federal figures for a joint return. Your taxable income passes $768,700 before the bonus, so the whole bonus falls in the 37% bracket. The $1 million counts supplemental wages from your employer and any business under common control. With your wages past the $184,500 Social Security limit, the bonus adds only Medicare tax: 1.45%, plus the 0.9% Additional Medicare Tax. Your employer withholds both. State income tax is separate.
One dollar can decide the golden parachute tax.
The golden parachute excise tax is 20% of change-in-control payments above your base amount, owed once those payments reach 3 times that base amount. Your base amount is your average taxable pay from the company over the five tax years before the change. If you joined later, only your years there count. If you prove, by clear and convincing evidence, that some of the pay is reasonable compensation for your work, the amount taxed can fall. Here the base amount is $500,000, so the line falls at $1.5 million.
| Under 3 times | 3 times or more | |
|---|---|---|
| Payments tied to the change | $1,499,999 Present value | $1,500,000 Present value |
| Excess parachute payment | $0 | $1,000,000 The payments minus one times the base amount |
| Your 20% excise tax | $0 | $200,000 On top of income tax |
| The company’s deduction | Kept | Lost on $1,000,000 |
The rule covers officers, owners of more than 1% of the stock by value and the most highly paid individuals. Payments from a company that could elect S corporation status are exempt. Payments from a private company are also exempt when owners of more than 75% of its voting power approve them after adequate disclosure. That vote must decide if you receive them, so an advisory vote does not count.
Five rules executives tend to miss.
Two incomes can leave Medicare tax underwithheld
A joint return owes the 0.9% Additional Medicare Tax on combined wages above $250,000. Your employer withholds it only on what it pays you above $200,000, whatever your spouse earns. If you earn $400,000 and your spouse $100,000, $1,800 is withheld against $2,250 due. You pay the other $450 with your return, on Form 8959.
Payroll tax on deferred pay comes years early
Social Security and Medicare tax on deferred pay is generally due once the work is done and the pay has vested. That is usually years before the payout. If your employer taxed it then, the payout is not taxed for payroll again.
A trading plan leaves the tax on each sale unchanged
Sales under a Rule 10b5-1 plan are taxed like any other sale, with the gain still the price minus your cost basis. The plan fixes your sales in advance, which gives you a defense against insider trading claims. As an officer or director, your first sale must wait 90 to 120 days after you adopt the plan.
Section 83(i) is closed to top officers
At an eligible private company, Section 83(i) can put off income tax on option or RSU shares for up to five years. Anyone who is or was the CEO or CFO cannot use it, and neither can their relatives. The rule also shuts out 1% owners and the four highest-paid officers, now or in the past 10 years.
Withholding can stand in for quarterly estimates
The IRS treats your withholding as paid in four equal parts on the estimated tax due dates, even if most came out in December. That lets extra December withholding cover a spring shortfall without quarterly estimated payments. Two safe harbors avoid the underpayment penalty: paying 90% of this year’s tax, or 110% of last year’s. The 110% applies once last year’s AGI passed $150,000, or $75,000 if married filing separately.
Have a CPA plan your pay before it is taxed.
Our CPAs help executives plan when their pay and stock are taxed, and file the federal and state returns that follow.
- We weigh a deferral election against taking the pay now, before your plan’s deadline.
- We compare what your employer withholds on each bonus and vest with the tax it will cost. We also work out the December withholding or estimated payments that close the gap.
- We time option exercises and share sales around your brackets, and plan the tax on the sales your 10b5-1 plan makes.
- We plan the tax on change-in-control pay before a deal closes.
- If the IRS writes about your withholding on a return we prepared, the reply is part of your fee.
- Individual return
- from $195
- Business return
- from $495
We quote a flat fee before work starts. We do not bill hourly.
What do executives ask about deferred pay and bonus tax?
Can you give me an example of tax planning?
One example is deferring the bonus you will earn next year, if your company offers a plan for it. If you elect by December 31 and the plan meets Section 409A, income tax usually waits until you are paid. Another is selling shares after more than a year, which cuts the top federal income tax rate on the gain from 37% to 20%. Above $200,000 of modified AGI, or $250,000 on a joint return, the 3.8% net investment income tax is added, for 23.8%.
Is a bonus taxed at 22% or 37%?
Both 22% and 37% are withholding rates, and neither one sets the tax on a bonus. A bonus is wages, taxed at your own federal rate, which runs from 10% to 37% for 2026. Your employer may withhold a flat 22% on supplemental wages up to $1 million a year, and must use 37% above that. Your return then settles the difference, as a refund or a balance due.
When do I have to elect to defer my bonus?
You elect by December 31 of the year before you earn the bonus, under Section 409A. A bonus for 12 months or more of performance can be elected until six months before the period ends, if your plan allows. The bonus amount must still be unknown when you elect. If you are newly eligible for this type of plan, you have 30 days, but only for pay you earn after electing. A bonus paid by March 15 of the year after it vests usually falls outside Section 409A, because it is not deferred.
Sources
- 26 U.S.C. § 409A, Deferred compensation under nonqualified plans
- 26 C.F.R. § 1.409A-1, Definitions and covered plans
- 26 C.F.R. § 1.409A-2, Deferral elections
- 26 C.F.R. § 31.3402(g)-1, Supplemental wage payments
- IRS, Publication 15 (2026), Employer’s Tax Guide
- IRS, Rev. Proc. 2025-32 (2026 inflation adjustments)
- Public Law 119-21 (One Big Beautiful Bill Act), § 70101
- 26 U.S.C. § 3101, Rate of tax (Additional Medicare Tax)
- 26 U.S.C. § 3121, Definitions (Social Security and Medicare wages)
- 26 U.S.C. § 280G, Golden parachute payments
- 26 C.F.R. § 1.280G-1, Golden parachute payments (questions and answers)
- 26 U.S.C. § 4999, Golden parachute payments (the 20% excise tax)
- 17 C.F.R. § 240.10b5-1, Trading on the basis of material nonpublic information in insider trading cases
- 26 U.S.C. § 83, Property transferred in connection with performance of services
- 26 U.S.C. § 6654, Failure by individual to pay estimated income tax
Reviewed and updated September 2026. General information, not advice for your situation.