You’re required to pay income tax as you earn, so most paychecks have a portion withheld for taxes. Employers often categorize your income into two types: regular income (like your salary) and supplemental income (such as annual bonuses, peer bonuses, stocks, and options). The withholding rate for regular income goes up with your salary, following the tax code structure. However, supplemental income is typically withheld at a federally mandated fixed rate of 22%. This default annual marginal tax rate on supplemental income may be too low.
Now, some employers provide the option to withhold taxes on supplemental income at a rate between 22% and 37%.
If you are exercising NQSOs or vesting RSUs in a high marginal bracket, the 22% default is the most reliable underpayment trap in the entire tax code. If your marginal rate is 32%, the 22% withhold leaves you ten points short on every dollar of stock-comp income; on a $200,000 NQSO exercise, that is $20,000 of unpaid tax that compounds quietly through the year and arrives as an underpayment penalty plus the balance owed in April. The supplemental rate jumps to 37% only when your aggregate supplemental income in a single calendar year crosses $1,000,000 — below that threshold, the 22% applies regardless of your actual bracket. Three remedies, in order of preference: (1) ask the employer to apply the higher 22–37% supplemental rate where the plan permits it; (2) increase salary withholding on remaining paychecks of the same year — the IRS treats withholding as paid ratably across the year, so December withholding retroactively cures earlier-year underpayments and is the cleanest way to close the gap; or (3) make a fourth-quarter estimated payment sized to the shortfall. Doing none of the three is the path most readers take, and is also the only one with a penalty attached.
Nonresident aliens file their U.S. tax returns using Form 1040NR, which does not allow a standard deduction. The standard deduction, which is readily available to U.S. citizens and resident aliens, serves to lower taxable income, thereby reducing the tax liability. Its absence on Form 1040NR means nonresident aliens do not automatically benefit from this reduction in taxable income.
Given the unavailability of the standard deduction on Form 1040NR, nonresident aliens must turn to itemized deductions to potentially lower their tax burden. Itemizing deductions involves listing specific allowable expenses that you’ve incurred during the tax year, which can be deducted from your adjusted gross income to arrive at your taxable income.
The process of itemizing requires meticulous record-keeping and an understanding of what deductions are permissible for nonresident aliens. These deductions might include, but are not limited to, state and local taxes paid, certain business expenses, and charitable contributions to U.S. organizations. Importantly, the process of itemizing allows for a more accurate computation of your tax obligation, tailored to your actual expenses that are recognized by the tax code as deductible.
It is your responsibility to make sure your tax withholdings throughout the year are accurate. Your employer is required to deduct taxes from each paycheck, but it’s up to you to ensure these amounts match your actual tax liability. Filing your income tax return after the year ends is essentially a way to reconcile what was withheld against what you actually owe. If you don’t withhold enough, you could end up with an underpayment penalty.
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