A few times a year, someone sits across from me with a tax bill they didn't see coming, and the story is usually the same: RSUs vested, the employer withheld the standard 22%, and their actual rate was 35%. Equity compensation is the most common source of five-figure tax surprises I see, not because the rules are secret, but because everyone assumes the withholding has it handled. It usually doesn't.
RSUs: taxed at vest, and usually under-withheld
Restricted stock units are the simple ones, on paper. When shares vest, their full market value is ordinary income on your W-2, exactly like a cash bonus. The problem is the withholding: federal tax typically comes out at the flat 22% supplemental rate (37% only on amounts over $1 million). If your marginal rate is 32% or higher, nobody is collecting the difference. That's on you, through estimated payments or a bigger bill in April.
One housekeeping item that saves real money: your basis in the shares is the value you were already taxed on at vest. Brokers sometimes report $0 basis on the 1099-B anyway. Leave it uncorrected and you'll pay tax twice on the same shares.
ISOs: where the AMT earns its reputation
Incentive stock options are the subtle ones. Exercise and hold past year-end and there's no regular tax, but the spread between market value and your strike price becomes a preference item for the Alternative Minimum Tax. Exercise a big block of appreciated ISOs and hold, and you can owe real AMT, in cash, on a gain that exists only on paper.
Your exit sets the tax. Sell in the same calendar year you exercised (a disqualifying disposition) and the AMT problem disappears, but the gain is ordinary income. Hold at least one year from exercise and two from grant, and a qualifying disposition gets long-term capital gains rates. The AMT math has to happen before the exercise. That's the whole reason to plan these in advance.
NSOs, ESPP, and one unforgiving deadline
- NSOs are the straightforward cousin: the spread at exercise is ordinary income, with withholding, and no AMT preference.
- ESPP discounts are taxed partly as ordinary income; whether a sale is "qualifying" hangs on holding periods that run from both the offering date and the purchase date.
- An 83(b) election (for restricted stock or early-exercised options) must be filed within 30 days of the transfer. No extensions, no do-overs. I've never seen an exception granted.
IPOs, tender offers, and state lines
A liquidity event squeezes years of equity into one tax year, usually at your top rate, often with a lockup dictating when you can actually sell. And if you moved states while the equity vested, more than one state will likely want a slice: vesting-period sourcing follows you. This is the situation where a planning conversation a few months ahead of the event genuinely changes the outcome.
Before an ISO exercise, model the AMT. After an RSU vest, set aside the gap between the 22% withholding and your real rate. And put the 83(b) deadline on a calendar the day the paperwork is signed. Equity comp rewards people who plan a quarter ahead.
This article is general information, not tax, legal, or accounting advice, and reading it does not create a CPA-client relationship. Tax rules change and depend on your specific facts. Please consult a qualified professional about your situation before acting.