Now that tax return season is over (hope it was good for you), it's time to look at the tax year ahead. Federal tax law requires you to pay at least 90% of your income tax liability during the year through either withholding or quarterly estimated tax payments (with a few safe harbor exceptions). If an option exercise or restricted stock/RSU vesting increases your income so that the standard withholding percentage is insufficient, you may need to pay estimated taxes to make up the difference and avoid paying penalties and interest. (The standard withholding percentage for federal tax on supplemental income is 25%, but the percentage is 35% for amounts of supplemental income over $1 million during a calendar year.)
You make quarterly estimated tax payments by the 15th (or next business day) of April, June, and September in the year of exercise/vesting and January of the following year. The deadline for the first quarter of 2011 recently passed on April 18. The next due dates for the 2011 tax year are June 15 and September 15 of 2011 and January 17 of 2012. One safe harbor approach is to make estimated payments, along with any salary and supplemental income withholding, that equal at least 100% of the previous year's total tax. For people with adjusted gross incomes (AGI) of more than $150,000 (or $75,000 if married and filing separately), the safe harbor level is 110% of the prior year's tax.
If you must pay estimated taxes, one small strategy is to exercise stock options just after the start of an estimated-tax period rather than just before it ends. See myStockOptions.com for other strategies involving estimated tax payments, for the safe harbors that let you avoid penalties, and for details on estimated taxes with NQSOs, ISOs, restricted stock/RSUs, and stock appreciation rights.