Preparing for Taxes: A 2020 Checklist for Tech Employees

by | Feb 27, 2020 | Financial Independence, Tax Planning

Preparing for Taxes: A 2020 Checklist for Tech Employees

by | Feb 27, 2020 | Financial Independence, Tax Planning

preparing for taxes

Preparing for taxes can be a doozy of a task… and not just for accountants.

Yes, while some filings are easier than others for us, you’ve still got a lot to sort out on your own before you ever come in to see someone like me.

I know, I know.


Especially since most tech employees like you don’t know the tax law inside & out. You’re not familiar with tax documents or what data you need.

And that’s fine… it’s why I’ve put together this article so you know what to get together and why… and why there’s a checklist at the end of this post to help you out.

First Things First: Get Ready to Prepare Your Taxes

Yes, we’re preparing to prepare in this step.

As nerdy as that sounds, it’s essential for filing a clean tax return, and for saving you as much money as possible.

1) Make Sure You’re Avoiding the IRS Tax Trap

Believe it or not, if you’re not careful when you report exercising your stock options, you can get double-taxed. ????

Here’s how:

If you exercised stock options last year, you’ll get a Form 1099B from the company that handles your employee stock options. On that form, it’ll show the initial cost basis (or strike price) you exercised at.

On the date you exercised, ordinary income was created for the difference between the strike price and the fair market value at the time. (Which you get taxed on at the ordinary income tax rate. ????)

Then, if you sell those options, you create more ordinary income for the difference between the strike price and the price you sold at. (Which… you guessed it… you get taxed on again.)

This ordinary income is reported on your W2, and not on the 1099B. So in order to avoid getting double-taxed on the difference of that ordinary income, you need to make sure you add any additional compensation included on your W2.

To do this:

1 – Read over your Form 1099B to understand how your cost basis information was calculated. 

2 – Make an adjustment on Form 8949, Column G to correct your cost basis and to make sure you don’t overstate your capital gains. 

2) Know Where You Stand With the Alternative Minimum Tax & Minimum Tax Credits

Alternative Minimum Tax is one of the most complicated tax subjects tech and startup employees have to deal with.

Basically Alternative Minimum Tax was put into place by the government so wealthy individuals could not just avoid paying tax by moving their money around in investments. It was enacted in 1969, and was updated in 2018 to be more on-par with inflation.

If you’ve exercised your Incentive Stock options this year, you may have to pay the AMT. If this is you, you’ll need to do some calculations around cost basis. Keep in mind that cost basis is different when calculating the exercise of your options and alternative minimum tax.

This article explains the difference of ISO, AMT, and cost basis in-depth, and even gives you some math-based examples.

3) Figure Out How Much You’ll Owe on RSU

RSU (restricted stock units) are shares you’re granted in a company just for working there. Meaning they’re investments you don’t even have to pay for. Score!

But since they are technically “income,” the IRS wants their share too, so any time your RSUs vest, you’ll owe taxes on them.

The cost basis of RSU is based on fair market value (FMV) at the time, so this could take a little research to figure out the different FMV amounts over the last year to correlate with each time you had RSUs vest.

For example, if you had 1,000 shares vest one month, and the fair market value was $10, that’s $10,000 of “income” you’ve got to pay taxes on, even though it wasn’t tangible cash that was deposited into your account.

Many times, tech and startup employees will have to sell some of their shares in order to pay the taxes on them, so this is something to keep in mind.

Read this article on cost basis and RSU for more in-depth information.

Second: Be Aware of Specific Tax Issues That Affect Tech Employees When Preparing for Taxes

There are certain tax issues that tech employees deal with that most workers never even have to think about.

For example, if your company goes through an IPO, there’s a lot to plan for there tax-wise. Not to mention supplemental wages, or what happens when your stock options and shares fall in price, and you have to do some selling at a loss.

1) Post-IPO Tax Math You Need to Calculate & Forms to Fill Out

If your company went through an IPO this year, you’ll have a lot of tax math on your plate to figure out.

For one thing, you’ll have more forms to deal with. Beyond your W2, you may need forms like your Statement of Taxable Income, Form 3921, Form 3922, and Form 1099-B. Read this article on tax things to be aware of after an IPO for a more in-depth explanation of each one.

On top of this, you’ll likely owe more taxes than were withheld from your paycheck or your IPO payouts from selling your shares. This is particularly common with our clients who have a regular RSU vesting schedule: while their companies do some withholding on these amounts for them, it’s hardly ever enough. Working with a tax preparer to figure out your gap here and the amount you owe and need to set aside.

Beyond that, a good financial planner will have ideas for tax planning now that you have shares you can sell on the stock market.

2) Calculate Your Supplemental Wages

By definition, supplemental wages are anything your company pays you that supplements your regular paycheck.

This includes your RSU, but it also includes things like bonuses, commissions, and nonqualified stock options.

More money is always great, but if you made money in one of these ways this past year, realize that the IRS withholding rules may mean you owe more than you planned come tax time.

With a regular salary, the more you get paid, the more your withholdings scale up… so ideally you don’t owe anything extra. But when your income is supplemental, the IRS doesn’t really guarantee anything like that here.

With supplemental wages, anything less than $1 million has 22% withheld, and anything over $1 million has 37% withheld.

This becomes a problem, for example, if you’re in the 32% tax bracket and only have 22% withheld. You’ll owe that extra 10% when you file.

If necessary, you can work with a financial planner to make an estimated tax payment beforehand, or you can ask your company to withhold more if they’re willing to do it.

3) Know What Capital Losses You Can Deduct

Not every IPO goes well, and sometimes tech employees find themselves in a situation where they’re actually losing money on their shares. There’s a difference between realized and unrealized capital losses on your taxes, and it’s important to know the difference.

An unrealized capital loss happens when shares you own are currently trading at less than what you bought them for. A realized loss happens when you actually sell these shares at a lower price than what you bought them for, meaning the shares are now out of your hands, and you have no potential benefit from them if the price goes back up.

While you are allowed to deduct these losses against your capital gains, we find that most tech employees in this situation haven’t built up enough capital gains for this to make a difference. This problem compounds if you have monthly-vesting RSU after the IPO, and all of your RSU gets taxed as ordinary income. Read more about capital losses, RSU, and disallowed wash sales here to understand what to plan for.

Third: Stay ‘Ready’ Even After Tax Season Is Over

Carefully preparing for tax season, especially as a tech employee is important. But even if you’ve got a whole team of accountants, financial planners, and tax preparers on your side, you could still end up getting one of those scary audit notices from the IRS.

The most common notice the IRS sends out is the CP2000 notice, which is in regards to income discrepancies, miscoded 1099s or 1099Rs, or erroneous cost basis records on stock sales.

If you get one of these: do not freak out. I know, easier said than done. But the truth is the IRS does make mistakes, and it happens more often than you’d think. If you get a notice in the mail from the IRS, talk to your tax preparer about it. They will help you find the errors in the forms, and how to reconcile them with the IRS paperwork.

For example, one of our clients got a CP2000 saying she owed more. However, after looking through the paperwork, we saw that the IRS didn’t have the proper records for her stock cost basis. Once we got that taken care of, she was in the clear and actually ended up getting a refund.

Your 2020 Checklist for Preparing Taxes

If this is the first time you’re preparing taxes after an IPO or stock option event, you’ll realize that there’s a lot to it. I know it can be easy to get discouraged with all the paperwork and cost basis research required, but do your best to keep your head up and treat it as a learning experience.

After you do it this first time, you’ll know exactly what to track in the upcoming year, and how to make things easier on yourself from here on out.

Here’s that checklist of items I promised you to help you in preparing taxes this year: 

  • Avoid double-tax on stock options exercise by checking Form 1099B & making an adjustment on Form 8949, Column G
  • Figure out whether you’ll be paying AMT… or if you have some minimum tax credit you can use from years before
  • Calculate your taxes owed on RSU, and whether you need to sell any shares to cover it.
  • Make sure you have all the post-IPO forms needed, like your W2, Statement of Taxable Income, Form 3921, Form 3922, and Form 1099B.
  • Calculate how much additional tax you owe on supplemental wages beyond your company’s withholding limits.
  • Calculate what losses you can deduct, and what capital gains you can deduct them against.
  • Keep your documents on file in case you get a CP2000 notice from the IRS.

As always, you can book a call with someone from our team to talk you through the tax preparation process, and to find out what we can do for you.

Since passing the Certified Financial Planner (CFP) exam in November 2009, Landon has dedicated himself to the needs of busy young professionals. Before joining KB Financial Advisors in 2012, Landon founded Cumberland Wealth Planners in 2010 to serve clients in Nashville, TN. Landon took over the On Your Way to Wealth program in 2014 to help KB Financial Advisors further expand their work with young tech professionals in San Francisco who have stock options.

When he’s not on a plane to San Francisco, Landon lives in Nashville, TN with his wife Melissa and their three children.


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