Avoid Tax Underpayment Penalties in CA
California is a land of opportunity for many. Silicon Valley, in particular, makes more millionaires than just about anywhere else. And although the opportunities are great, this newfound wealth often means that people make mistakes with their taxes. One of the biggest mistakes people make with their money is accidentally paying tax underpayment penalties.
The IRS and the CA Franchise Tax Board (CA FTB aka CA IRS) have rules around how much tax should be paid in throughout the year, and while you’d think that the rules at the federal level and at the California level would be the same, they’re drastically different for high earners.
These differences, combined with income from RSUs and other equity comp sources, make it easy for high earners to accrue underpayment penalties for not following rules they didn’t realize they are required to follow.
The purpose of this article is to teach you about CA’s estimated tax payment rules and how to avoid underpayment penalties so that you can avoid the pain of paying extra fees and taxes on top of an already high income tax rate.
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Taxes CA Expects You to Pay During the Year
California expects you to pay taxes as you earn income throughout the year. The bare minimum that the state requires you to pay throughout is known as the Safe Harbor amount.
If you pay the proper Safe Harbor amount, then you will not owe underpayment penalties as long as you pay any remaining taxes by the typical 4/15 deadline.
This sounds great, but the difficulty is that in California, Safe Harbor has multiple methods of calculation depending on your expected income for the year. So let’s break down the rules a bit further.
Safe Harbor Rules in CA
There are two types of Safe Harbor calculation methods that give you some dollar amount that must be paid in throughout the year to avoid underpayment penalties.
Safe Harbor #1: Based on Prior Year Taxes Owed in CA
Pay 100% of last year’s California tax if income was under $150,000 MFJ ($75,000 single).
Pay 110% of last year’s California tax if income was over $150,000 MFJ ($75,000 single).
Safe Harbor #2: Based on Current Year Expected Taxes Owed
Pay 90% of your current year's California tax liability.
So long as your total income is less than $1M, you’re allowed to use either Safe Harbor method.
Once you cross $1M of income, you’re required to use method #2 and base your Safe Harbor on the taxes you’re expected to pay this year.
Here’s a table summary to help you visualize it a bit better:
Whichever of these methods results in the lowest amount of taxes paid in, that is the minimum amount that the state of California will require you to pay in to avoid underpayment penalties.
We’ve simplified this to say income instead of CA Adjusted Gross Income for all you non-tax professionals reading this. To guesstimate your CA AGI, you’ll want to tally your income from every source you have (wages, bonuses, RSUs, dividends/interest, capital gains, rental income, etc.). When you go to calculate your tax, you’ll want to first reduce your AGI by at least CA’s standard deduction.
Where to Find Prior Year Taxes Owed in CA
The best place to find your prior year taxes owed is in your prior year CA tax return. Seems obvious, but we want to explicitly state this here so you know that you’re not wasting time by looking for it.
On the tax return itself, you’ll want to find the number that is entered on Line 64. This will show your total tax.
Here’s an example of what it looks like (and yes, it’s really this ugly looking):
One of the most common mistakes people make is that they will use taxes owed vs total tax. The Prior Year Safe Harbor rule for California applies to the total tax, not the balance you had to pay.
Quick Example of Prior Year Safe Harbor
If you paid the prior year total tax in the previous example above, you’d be able to pay in 110% of $11,064, which comes to $12,170.40, throughout the current tax year to avoid underpayment penalties. (This is assuming you make less than $1M.)
This would help you avoid underpayment penalties and it’s much easier to calculate than the 90% option for Safe Harbor.
(We’ll get into the specific timing of payment in a bit.)
Calculating Your Current Year Tax For Safe Harbor in CA
If you want to calculate 90% of the current year’s tax, there’s no magic place you can go to to find just the right number.
You’ll need to run a tax projection based on what you’re expected to make, what deductions you’re expected to take, and what automatic withholdings should happen.
You could get really precise with these calculations, but often it’s easiest and reduces the chance of paying a penalty if you simply choose to run quarterly estimates instead.
The simplified process is to:
Grab your recent pay statement
Annualize the income, deductions, and withholdings
Sum up all of your taxable interest and gains from all accounts, then annualize
Reduce income by your expected deductions
Calculate the tax
Multiply the tax by 90%
De-annualize the tax by multiplying by the applicable percentage for the quarter (this is the final step for determining the quarterly amount)
There are plenty of tools to help you estimate the tax bill. SmartAsset has a good CA Income Estimator. We also have a super simple one below that we’re happy to share with you.
Once you have the total estimated tax based on your projection, you’ll take 90% of that number to find your current Safe Harbor amount.
The purpose of annualizing yourincome is to put you in the tax bracket you’d be in if your income and equity compensation continued at the same pace. The can result in overpayments at the beginning of the year that taper off as you continue to run more projections.
When to Pay Estimated Taxes in CA
If calculating your estimated taxes wasn’t already hard enough, California has an odd schedule in which they want you to pay in your estimated taxes.
One would think that if they want you to pay in an even 25% evenly spread out throughout the year, but this is not the case.
California divides its required estimated taxes into “quarters,” but these quarters aren’t even fourths of the year, and neither is the amount that you need to pay in.
Timing of Estimated Tax Payments in CA
Q1 - 30% due on April 15th
Q2 - 40% due on June 15th
Q3 - 0%
Q4 - 30% due January 15th the following year
So if 100k was your expected total Safe Harbor amount, based either upon a projection or based on the prior year method, you will need to have paid in $30k on April 15th, $70k on June 15th, and $100k paid in by January 15th the following year.
Then, come April 15th of the following year, you’ll pay any additional taxes without penalties.
Doing the math, you will quickly realize that California expects you to have 70% of your expected Safe Harbor amount paid in by June 15th.
It should be noted that if you’re doing the current year method, the expected Safe Harbor amount can easily change since you’re trying to estimate future taxable events.
Where High Earners Get Tripped Up
There are five ways we see high-earners get tripped up with estimated payments and end up owing underpayment penalties in California.
#1 - You earn more than $1M
If you earn over $1M, you have to pay 90% of your estimated tax for the current year. You are not able to rely on the prior year Safe Harbor method. You will have to estimate taxes to get a sense of what you’re supposed to have paid in.
#2 - Not accounting for other income sources
The second way people get tripped up with CA estimated taxes is that they do not account for interest from their high-yield savings accounts and don’t account for capital gains.
The state of California doesn’t have any special tax rate for capital gains, so everything is taxed at the same rates or the same rate schedule.
Now that people are earning fairly decent interest on cash sitting in their bank account, if you have a decent-sized emergency fund, you can actually earn a significant amount of interest throughout the year.
This interest typically does not have income taxes withheld on it. And when you sell stock for a gain, there will typically be no withholdings there either.
If you’re a high earner in the state of California, it’s likely that you would be better off using Treasury money market funds or potentially California money market funds instead of using fully taxable ways of earning interest.
#3 - Not meeting deadlines or percentages for CA
The next mistake people make with California estimated taxes is that people won’t meet California’s weird “quarterly” deadlines.
We talked about this in the section before, but it’s worth calling out specifically as a mistake people commonly make.
You need to know the percentages to pay in AND the dates when they’re due.
#4 - Not realizing that underwithholding is happening on RSUs
The fourth way people get tripped up with estimated taxes is that they don’t realize how significant the under-withholding from RSUs can be.
When RSUs vest at a public company, they are taxable at that time, and the company will withhold taxes at the Federal and State levels based on where you live.
The statutory withholding rate (required withholding rate) on RSUs is 22% for Federal and 10.23% for California.
This 10.23% withholding rate for California works for earners earning less than $360k if single or $720k if married, is admittedly not as big of a deal. The Federal withholding is the larger issue at that level.
It’s also worth noting that this same particular withholding issue happens with Nonqualified Stock Options (NSOs).
#5 - Income drop from one year to the next
The last way people get tripped up regardless of total earning, is if they go from making more one year to making less the next.
This can happen for any number of reasons, but it’s extremely common if your compensation is largely tied to RSUs.
If your stock price goes down from one year to the next, you could easily find yourself needing to make estimated payments based on the 90% Safe Harbor rule instead of the 110% Safe Harbor rule.
How RSUs Affect Expected Tax Payments
Receiving RSUs is a big benefit, especially if your company stock price goes up. However, because of how variable company stock prices can be, this means that at any given moment you could be paying in too much in estimated payments or underpaying for estimated taxes.
As you progress through the year, your tax calculations become more and more accurate because more details are known about the current tax year.
The variability of RSU income often means that you will need to run quarterly calculations simply because you cannot rely on data copied and pasted from prior quarters.
The big thing to note here is that whether you owe Federal estimated taxes or California estimated taxes, if you need to sell RSUs to have cash, you will need to stay aware of trading windows.
Ultimately, avoiding tax penalties and maintaining tax awareness is a great way to avoid paying taxes on RSUs.
Tax Penalties in CA
There are two different types of penalties you can get hit with in California.
Estimated Tax Penalties
Late Payment Penalties
Estimated tax penalties happen during the year if you don’t pay in enough tax as you go.
California expects estimated payments to come in throughout the year according to the schedule we’ve already discussed. If you don’t meet these requirements, they’ll charge you an interest penalty. Here are California’s published interest rate penalties. For 2025, it’s an annual rate of either 7% or 8%.
Late payment penalties kick in after April 15 if you still owe taxes and haven’t paid. This is more like a classic late payment penalty and serves as a reminder to pay on time, even if you extend!
California charges:
5% of the unpaid amount up front (N/A if you’ve paid 90% of taxes owed)
0.5% per month for up to 40 months (up to a 25% maximum)
Between these two California penalties, it can become costly if you haven’t done a good job with tax planning. There are also a couple of tricks to avoid these penalties that require a professional to evaluate and catch.
How We Help You Avoid Underpayment Penalties in CA
The best way to ensure you don’t pay underpayment penalties in the state of California is to run quarterly projections to be sure that you’re in the ballpark of the estimated tax payments that will be required.
Unfortunately, there aren’t a lot of good consumer tools at your disposal to help you do this. That’s why we’ve built an RSU tax calculator that can help estimate.
For our clients that go through a PlanFTW one-time engagement, we share a spreadsheet to help clients track estimated tax payments on their own.
For our ongoing clients, we use professional tax software and will often run rough quarterly estimates for clients depending on their situation.
Final Thoughts on Avoiding Tax Underpayment Penalties in CA
California already has some of the highest income tax rates in the country, so the last thing you want is to have to pay even more in the form of penalties.
If your income includes RSUs, stock sales, or other equity compensation, the risk of underpayment penalties can be quite high at both the California level and the Federal level.
We specialize in helping high-earning tech employees navigate the quirks and complexities of California’s tax system to make sure you have full tax awareness throughout the year and avoid any unwanted surprises.
If you don’t want to figure it out alone, we’re happy to help.