The withholding on your RSUs is probably wrong.
Employers withhold on equity income at a flat supplemental rate. Your bracket is higher. The difference shows up as a surprise balance due in April — and it's the least expensive of the equity compensation problems we fix.
The 22% gap
Supplemental wages — bonuses, RSU vests, NSO exercises — are withheld at a flat 22% until they exceed $1 million for the year, then 37%. A household in the 35% bracket is under-withheld by roughly 13 points on every vest.
On $200,000 of vested RSUs, that is on the order of $26,000 of federal tax that nobody collected, plus state, plus the 3.8% net investment income tax on whatever the shares do afterward. If the vests are quarterly, the shortfall compounds through the year and arrives with underpayment penalties attached.
The fix is unremarkable — estimated payments timed to the vest schedule, or a W-4 adjustment sized to the shortfall. What matters is that it is done in the year the shares vest, which requires someone to be looking at the grant schedule in advance.
Federal tax under-withheld at the 22% supplemental rate. Illustrative only; actual figures depend on total income, state, and the year's brackets.
Five instruments, five different tax events
The word "equity" covers instruments that are taxed at different times, at different rates, and reported on different forms. The planning for each is different too.
| Instrument | Taxable event | Character of income | Reported on | The trap |
|---|---|---|---|---|
| ISOIncentive stock option | Exercise, for AMT only (the spread). Sale, for regular tax. | Long-term capital gain if held 2 yrs from grant and 1 yr from exercise. Otherwise ordinary on the spread. | Form 3921 at exercise · W-2 only on a disqualifying disposition | AMT due on gain you haven't realized. Sell early and you've paid AMT and lost the capital gain treatment. |
| NSONon-qualified stock option | Exercise. | Ordinary income on the spread (W-2, withheld at 22%). Post-exercise appreciation is capital gain. | W-2 box 12 code V · 1099-B at sale | Broker reports basis as the strike, not FMV at exercise. The spread gets taxed twice unless Form 8949 is adjusted. |
| RSURestricted stock unit | Vest (or a later settlement date if deferred). | Ordinary income at fair market value on the vest date. Appreciation after vest is capital gain. | W-2 · 1099-B at sale | Flat 22% withholding vs. a 35–37% bracket. Shares sold to cover often show $0 basis on the 1099-B. |
| ESPP§423 employee stock purchase plan | Sale. | Discount is ordinary income even in a qualifying disposition; the rest is capital gain. | Form 3922 at purchase · W-2 in year of sale | The ordinary portion is often omitted from the W-2. Basis on the 1099-B excludes it. Reconcile or overpay. |
| RSARestricted stock / early exercise | Vest — unless an 83(b) election moves it to grant. | Ordinary at FMV when it vests. With 83(b): ordinary at grant (often near zero), all growth is capital gain. | 83(b) statement filed with the IRS within 30 days of transfer | 30 days. No extension. If the shares are forfeited, the tax paid is not refunded. |
The AMT crossover
The most consequential single decision in equity compensation is how many ISOs to exercise-and-hold in a given year. Too few and you leave long-term capital gain treatment on the table. Too many and you owe alternative minimum tax on gain you may never see.
The spread on an ISO exercise is not regular taxable income. It is an AMT preference item. Every household has a crossover point — the amount of ISO spread that can be exercised in a year before AMT exceeds regular tax. Below that point, exercising and holding is nearly free. Above it, each additional dollar of spread costs 26–28 cents of AMT, paid in April against shares you still own.
We compute the crossover in the fall projection, when year-to-date income is mostly known, and size the exercise to it. AMT paid generates a credit that comes back in later years — but only if the return is prepared to track it, and only if the stock doesn't fall first. Post-exercise declines are where ISO holders get badly hurt: AMT on the spread at exercise, then a capital loss limited to $3,000 a year.
How much ISO spread to exercise this year. Whether a same-year disqualifying sale of part of the position is cheaper than the AMT. Whether the qualifying holding period (2 years from grant, 1 from exercise) is worth the concentration risk.
When the tax answer and the portfolio answer disagree
The lowest-tax path is often to hold. The lowest-risk path is often to sell. An equity compensation plan has to reconcile the two — which is why our tax planning is coordinated with your broader financial plan rather than done in isolation.
A five-year vest schedule at a company that has done well produces a position that is a large share of net worth, held in the same company that pays the salary. The tax on unwinding it is real. So is the risk of not unwinding it. The planning conversation is about sequencing: which lots to sell first, how much to diversify each year inside a target bracket, whether appreciated shares belong in a donor-advised fund instead of a brokerage sale, and how a 10b5-1 plan interacts with the tax calendar.
Where investment advice is needed, it is provided under a separate engagement with an affiliated financial planning firm. What we bring to that conversation is the tax model — lot by lot, year by year.
The equity compensation timeline
Each grant moves through the same sequence. The tax outcome is set by what happens at each step — and one of them has a 30-day clock.
- Grant
Read the agreement, not the summary
Instrument type, vest schedule, expiration, post-termination exercise window, and whether early exercise is permitted. The grant document determines every choice that follows.
- Within 30 days of transfer
The 83(b) window
For restricted stock or early-exercised options, an 83(b) election taxes the shares now at current value — often near zero at an early-stage company — so all future growth is capital gain.
TrapThirty calendar days from the transfer date. Not the vest date, not the signing date. There is no late election. - Each vest
Fix the withholding
RSU vests are income the day they occur. Estimated payments or a W-4 adjustment sized to the gap. Decide sell-to-cover vs. hold on each tranche and record the FMV — that number is the basis your broker will get wrong.
- Exercise window
Size the exercise
ISOs: exercise up to the AMT crossover and hold. NSOs: exercise when the spread is small or when the income year is otherwise low. Expiring options are exercised whether or not the timing is ideal — a plan avoids the forced exercise.
- Holding period
Track the qualifying dates
ISO: 2 years from grant and 1 year from exercise. ESPP: 2 years from the offering date and 1 from purchase. A sale one day early changes the character of the whole gain.
- Sale
Correct the basis
The 1099-B from the broker almost never reflects the income already reported on your W-2. Form 8949 adjustments reconcile it. Without them, the spread is taxed twice.
- By December 31
Close the year on purpose
Final exercise sizing, loss harvesting against realized equity gains, charitable gifts of appreciated shares, Q4 estimate confirmed. Form 3921 and 3922 arrive in January; the planning has to be done before they do.
Equity compensation tax questions
Why do I owe tax on RSUs when tax was already withheld?
Employers withhold federal tax on RSU vests and other supplemental wages at a flat 22% (37% above $1 million for the year). A household in the 32%, 35% or 37% bracket is under-withheld on every vest; on $200,000 of vested RSUs in the 35% bracket the gap is roughly $26,000 before state tax. Estimated payments timed to the vest schedule, or a W-4 adjustment, close it in the year the shares vest.
When are incentive stock options (ISOs) taxed?
Exercising an ISO creates no regular income tax, but the spread between the strike price and fair market value counts for the alternative minimum tax. Regular tax applies when the shares are sold. If the shares are held 2 years from grant and 1 year from exercise, the gain is long-term capital gain; selling earlier makes the spread ordinary income.
What is the ISO AMT crossover?
It is the amount of ISO spread a household can exercise in a year before the alternative minimum tax exceeds regular tax. Below that point, exercising and holding costs little or nothing; above it, each additional dollar of spread costs roughly 26 to 28 cents of AMT. We calculate it in the fall projection, when the year's income is mostly known, and size the exercise to it.
Why does my 1099-B show the wrong cost basis for RSU or NSO shares?
Brokers often report $0 basis for RSU shares, or the strike price for NSO shares, even though the value was already taxed as wages on your W-2. Unless the basis is corrected on Form 8949, the same income is taxed twice.
What is the deadline for an 83(b) election?
Thirty calendar days from the date the restricted stock is transferred to you, not the vest date or signing date. There is no late election or extension.
Have a grant schedule and a vest coming up?
Send the grant agreements and your most recent pay stub. The first conversation is a walk through what you hold and what the next twelve months of it will cost.