A payment of federal tax that a taxpayer makes when no taxes or not enough taxes are paid through withholding from income. Federal tax law requires individuals to pay at least 90% of their income tax liability through either withholding or quarterly estimated tax payments. The penalty for failing to withhold or pay by installments sufficient amounts of taxes is the payment of interest (at stated federal rates) on the amount of underpaid taxes. Even if you did not, there are safe harbors you may fit into to avoid the penalty.

Before you receive an NQDC distribution, you should determine whether you need to make estimated tax payments. Use the worksheet for IRS Form 1040-ES (Estimated Tax for Individuals). As explained in a related FAQ on this website, whether you should pay estimated taxes depends on various factors, including whether you were an employer (e.g. a director) and whether taxes are withheld at distribution.