You join a company as an employee and fill out a form that says "I'm single with no dependents" and then they figure the withholding.
That algorithm is broken - it doesn't withhold the required amount for many people at RSU-granting jobs.
It's insane that the system is designed for most people to be FTEs and have their taxes withheld, but the provided formula doesn't withhold the required amount and they act like that's your fault.
I understand that you mean to be helpful, but the IRS is indefensible.
>That algorithm is broken - it doesn't withhold the required amount for many people
This has been an issue historically, but spiked bigly after the 2017 Republican Tax plan. They perm lowered the corp tax rate from 35% down to 21%, perm lowered taxes overall for the wealthy.
The middle class and lower end, had their DEDUCTIONS lowered, but the taxes owed didn't change. This caused it to appear that they got a lowered tax rate, then everyone got hit with owing all of that "largess" in 2018.
TL;DR: Republican fuckery made it much worse, but it's always been a thing.
> You join a company as an employee and fill out a form that says "I'm single with no dependents" and then they figure the withholding.
That's not all the form says, though, unless the employer is offering you a very simplified version in their onboarding system which is not something they're allowed to insist on. (They can make a substitute W-4, but they still need to provide the various IRS instructions and worksheets, and you still need to be able to adjust your withholding adequately.)
Step 4 of the form lets you adjust things however you need. Additionally, the first page of the instructions encourages you to use a more precise estimator at www.irs.gov/W4App if you, among other circumstances, have capital gains or bonuses - RSUs fall within that scope.
For situations too complex for the online estimator (which sometimes absolutely can arise for FAANG employees), both the estimator landing page and the W-4 instructions point you to the worksheets in Publication 505. But you don't have to go to that extreme if you just use the solution just below based on the previous year's total tax liability.
> That algorithm is broken - it doesn't withhold the required amount for many people at RSU-granting jobs.
Agreed, unfortunately. At least, you can just make sure your total withholding for the year is at least 110% of your previous year's tax liability (I'm going to assume you're too high-income to use the 100% level), and then you don't have to care if it withholds the right amount since it will still be enough to avoid a penalty.
> It's insane that the system is designed for most people to be FTEs and have their taxes withheld, but the provided formula doesn't withhold the required amount and they act like that's your fault.
For FTEs with simple situations like just salary or wage income at a single job throughout the year and not much other income, it does a pretty good job.
For more complicated personal situations, most tax systems worldwide need the taxpayer to do more calculations and/or sometimes advance payments to get the right contributions and forms to the right accounts and offices at the right times of year. The US system is less unique in this regard than you might think. And yes, a FAANG employee with RSUs is a more complicated personal situation - I know this firsthand, having been one myself in the past.
> I understand that you mean to be helpful, but the IRS is indefensible.
I agree that the US tax system is far too complicated, but it's a harmful political trope for the blame to be directed at the IRS when almost all of the responsibility for the complexity lies with Congress. Politicians and propagandist think tanks love to popularize that incorrect framing.
The IRS can't do anything with most of the complaints directed at it, since they're mostly just implementing the statutes enacted by the politicians in Congress. (A few of the details are decided by policymakers at Treasury/IRS in regulations and other administrative policies like revenue procedures, but these are just filling in the details on what the politicians legislated.)
At the same time, the politicians who actually legislate most of these rules manage to escape blame from their voters, because everyone pretends that the IRS is to blame for what Congress actually decides. So the politicians are free to listen to the lobbyists who will actually decide their donations based on whether the politicians obey them, instead of their voters who won't correctly hold them accountable at the ballot box on this issue.
The coup-de-grace is that those politicians who serve the wealthy ruling class get political support to defund the IRS based on how much people incorrectly hate the IRS for what Congress has legislated, rather than anything about what's appropriate for the IRS's actual duties.
This has two big consequences: One, the wealthy ruling class can get away with a lot of shady tax shenanigans, because the IRS can no longer afford to audit them and then fight them in court all the way to conclusion, whereas the wealthy taxpayers can afford more legal firepower than the IRS. And two, exactly because of this inability to properly audit major tax scofflaws, the government actually gets less tax revenues when the IRS receives less funding.
So cutting the IRS budget due to politically misdirected blame forces budget reductions to a lot of other services on which the population relies, and yields far weaker governmental oversight of the ruling class who can get away with increasing amounts of misbehavior.
That algorithm is broken - it doesn't withhold the required amount for many people at RSU-granting jobs.
It's insane that the system is designed for most people to be FTEs and have their taxes withheld, but the provided formula doesn't withhold the required amount and they act like that's your fault.
I understand that you mean to be helpful, but the IRS is indefensible.