Equity compensation
RSUs, options and ESPP, planned while the numbers can still change.
Equity is where high-income returns most often go wrong, and the errors are expensive, avoidable, and almost always discovered too late to fix.
The withholding gap almost nobody is warned about
This single issue produces more surprise April balances than any other item on equity-heavy returns.
When RSUs vest, most employers withhold federal tax using the optional flat rate for supplemental wages: 22%, on supplemental wages up to $1 million in a calendar year. If your actual marginal rate is 35% or 37%, the withholding is short by thirteen to fifteen points of the entire vest.
On a $200,000 vest that is roughly $26,000 to $30,000 of federal tax that nobody collected. The shares look like they were taxed. Your payslip shows tax withheld. The shortfall does not appear until the return is prepared, and by then the only question is how you are going to pay it, often after the shares have already dropped.
Above $1 million of supplemental wages in a calendar year, withholding on the excess is mandatory at 37%, which helps, but by then the numbers are large enough that the earlier shortfall is already substantial.
What we cover
The four instruments that account for nearly all equity compensation questions.
RSUs
Withholding shortfall at vest, estimated payments, whether to sell at vest or hold, and how a vest interacts with everything else in your year.
Stock options and AMT
Incentive stock options can trigger alternative minimum tax on exercise even when you sell nothing. Exercise timing, spreading an exercise across tax years, and disqualifying dispositions.
ESPP
The discount is ordinary income, and whether a sale is qualifying or disqualifying changes both the amount and the character. The reporting on the 1099-B is frequently wrong.
QSBS and founder stock
Section 1202 can exclude a substantial amount of gain on qualified small business stock, but qualification is technical and the holding period is unforgiving.
Cost basis that is actually right
Broker statements routinely report a basis that ignores the income you already paid tax on at vest or purchase. Left uncorrected you pay tax twice on the same money.
The year around a liquidity event
A large vest, exercise or sale distorts everything: bracket, capital gains rate, net investment income tax, deduction phase-outs and estimated payments.
When to talk to us
Before a large vest or exercise, not after. Almost every lever (withholding, estimates, exercise timing, which lot to sell) only exists beforehand.
Before you leave a company. Departure starts exercise windows that are usually short, and an ISO that is not exercised in time converts to something taxed less favorably.
Before an IPO or acquisition. Lock-ups, 83(b) decisions and QSBS holding periods all have dates attached that cannot be moved later.
If you have already had the surprise. If a previous return produced a balance you did not expect, it is worth checking whether the basis was reported correctly. The double-tax error is common and it is amendable.
Frequently asked questions
Why do I owe so much tax when my RSUs were already taxed at vest?
Because the withholding at vest was almost certainly not enough. Most employers withhold federal tax on supplemental wages using the optional flat rate of 22%, which applies up to $1 million in a calendar year. If your marginal rate is 35% or 37%, you are short by thirteen to fifteen points of the vest value, and that gap is not collected until you file. The shares were taxed, just not at your rate.
Should I sell my RSUs as soon as they vest?
That is a financial planning question as much as a tax one, but the tax angle is simpler than people expect. You are taxed on the full value at vest regardless of what you do, and your basis resets to that value. Selling immediately produces little or no additional gain. Holding is a decision to make a new, undiversified investment in your employer with money you have already been taxed on.
What is the AMT problem with incentive stock options?
Exercising an ISO and holding the shares creates no regular taxable income, but the spread between the strike price and the fair market value counts for alternative minimum tax. So you can owe real cash tax on a gain you have not realized, on shares you cannot necessarily sell. Planning the size and timing of an exercise, sometimes splitting it across two tax years, is how this is managed.
My broker reported a cost basis that looks wrong. Is that normal?
Unfortunately yes, and it is one of the most common errors we correct. Brokers frequently report only what you paid, ignoring the compensation income already included on your W-2 at vest or purchase. If that is not adjusted on the return you pay tax a second time on income you have already been taxed on. It is worth checking prior years as well.
Do I need to do anything special when I leave my employer?
Almost certainly. Departure typically starts a short window to exercise vested options, often ninety days, and an incentive stock option not exercised inside it loses its ISO treatment. Unvested equity is usually forfeited. These are date-driven and there is no relief for missing them, so it is worth a conversation before you resign rather than after.
Can you help if my situation involves a startup and QSBS?
Yes. Section 1202 can exclude a substantial amount of gain on qualified small business stock, but the company, the stock and the holding period all have to qualify, and the analysis is easier to do while the facts are still forming than years later at an exit.
What does this cost?
Equity compensation work is quoted individually, because the range is wide. A single RSU vest on an otherwise straightforward return is very different from a multi-year ISO exercise strategy with AMT modeling. We will give you a fee before any work starts.
The useful conversation happens before the vest
If you have equity vesting, options to exercise, or a liquidity event coming, a short call now is worth considerably more than a good preparer in April.