The Short AnswerRSU income is generally taxed as ordinary income when shares or cash are delivered after vesting, subject to the award's settlement terms, and employers typically withhold federal tax at a flat 22% on supplemental wages up to $1 million, well below a 35% or 37% bracket. Executives who plan around vesting dates, bonuses and liquidity events can see the April bill coming.
Why Do RSUs And Bonuses Leave Executives Owing Tax?
Supplemental wages such as bonuses and RSU income are generally withheld at a flat 22% federal rate up to $1 million a year, and 37% above that. An executive in the 35% or 37% bracket can owe a large balance at filing time, plus California tax on top. Planning the gap in advance keeps it from becoming a scramble.
When Is An RSU Taxed Under Section 83?
Section 83 of the Internal Revenue Code covers property transferred in connection with services. It includes the excess of the stock's fair market value over the amount paid in gross income in the first taxable year in which the rights are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. RSU income is generally recognized when shares or cash are delivered after vesting, subject to the award's settlement terms. The IRS sets the Additional Medicare Tax rate at 0.9% and the threshold at $200,000 of wages for a single filer or $250,000 for a married couple filing jointly.
Which Equity Events Need Tax Planning?
- RSU vesting and delivery, which generally counts as wages when shares or cash are delivered.
- Stock options, where incentive stock options can trigger the alternative minimum tax.
- Concentrated stock in one company, and the capital gains on diversifying it.
- Deferred compensation elections, which must be made before the year the income is earned.
- A liquidity event, which can put a decade of income into one tax year.
How Do ISOs And NSOs Differ?
- Incentive stock options (ISOs). The IRS says you generally do not include any amount in gross income when you receive or exercise a statutory stock option, though you may owe alternative minimum tax in the year you exercise an ISO. A sale generally produces a capital gain or loss, unless the special holding period requirements are missed, in which case income from the sale is ordinary income.
- Nonstatutory options (NSOs). The IRS says most nonstatutory options have no readily determinable fair market value. For those, there is no taxable event at grant, and the fair market value of the stock received on exercise, less the amount paid, is included in income at exercise.
For ISO treatment, section 422(a)(1) requires that no share be sold within 2 years from the date the option was granted or within 1 year after the shares were transferred to you. Section 422(d) treats options as non-ISOs to the extent the stock first becoming exercisable in a calendar year, valued at grant, exceeds $100,000, so one grant can hold both types.
How Does The Alternative Minimum Tax Apply To ISOs?
The IRS describes the AMT as the excess of the tentative minimum tax over the regular tax, and it is owed only if the tentative minimum tax for the year is greater than the regular tax. For an ISO holder the exercise year is the one to watch. The employer sends a Form 3921 after an ISO exercise. California's Form 540 instructions direct filers with incentive stock option income above the amount reported on the return to Schedule P (540), the state alternative minimum tax form.
What Rules Apply To Deferred Compensation Elections?
Section 409A governs nonqualified deferred compensation. Pay for services performed during a year may be deferred at the participant's election only if the election is made not later than the close of the preceding taxable year, or at another time the regulations provide. In the first year a person is eligible, an election can be made within 30 days after becoming eligible, for services performed after the election.
The cost of a miss is high. When a plan fails the 409A requirements, the compensation can become includible in income, with interest and an additional tax equal to 20 percent of that amount. California conforms in general and adds its own additional 5% tax plus interest.
What Changes When One Stock Is Most Of Your Net Worth?
Shares held for more than one year before a sale generally produce a long-term capital gain, and the IRS says a 20% rate applies to the extent taxable income exceeds the thresholds set for the 15% rate. The 3.8% net investment income tax can apply on top when modified adjusted gross income exceeds $200,000 for a single filer or $250,000 for a married couple filing jointly, and the IRS lists capital gains among investment income. The value included in wages when RSU shares are delivered generally becomes the basis for a later sale, so a sale generally measures the change since then.
How Does California Treat Equity And Bonus Income?
California's 2025 rate schedules reach 12.3%, starting above $742,953 of taxable income for a single filer and above $1,485,906 for a married couple filing jointly, and a 1% Behavioral Health Services Tax applies to taxable income over $1,000,000. California does not have a lower rate for capital gains, and all capital gains are taxed as ordinary income. A nonresident has California source income to the extent services were physically performed in California.
Which Uses Of After-Tax Cash Can Executives Review?
Once the tax is planned, the question becomes how to use the cash that remains after tax. Qualified plans, investment accounts and life insurance each have their own rules, costs and tax treatment, and how to allocate money among them is a decision for your own licensed investment and tax advisors. See retirement tax planning for how pre-tax balances are taxed later.
Who Does Executive Tax Planning Fit?
It fits executives with RSU vests, option exercises, bonuses or deferred compensation elections ahead, because those events carry dates, and executives who hold company stock for more than a year with a large share of net worth in it. It fits less when pay is a flat salary with no equity or deferral choices. Tyler is a licensed insurance agent, not a CPA or attorney, so tax and legal advice stay with your own advisors while the plan is built alongside them.
What Should An Executive Bring To The First Call?
The first call is 30 minutes on Zoom. Helpful items are your last two tax returns, your latest W-2, equity award statements with the vesting schedule, any Form 3921 and the name of your CPA.
What Does Executive Tax Planning Look Like In Ventura County?
The 2024 Department of Labor filings list at least 115 Ventura County employers with a small defined benefit or cash balance plan, and 28 of them are professional services firms while 4 are in finance and insurance. Executives and partners at employers like these meet the same equity, bonus and deferred compensation questions as anywhere in California. Employers in Westlake Village, which is in Los Angeles County, are not counted.
Executive meetings run on Zoom, or in person around Ventura County from Tyler's base in Moorpark. Read how planning works for executives and owners across Ventura County.
Common Questions
How are RSUs taxed?
RSU income is generally taxed as ordinary wage income when shares or cash are delivered after vesting, subject to the award's settlement terms. The value included in wages generally becomes your basis, so any later gain or loss is a capital gain or loss when you sell. Federal withholding is usually 22% on supplemental wages up to $1 million, which often falls short of the actual bracket.
Why do I owe so much tax after my RSUs vested?
Because the default 22% federal withholding on supplemental wages is lower than the 32% to 37% bracket many executives are in, and state withholding may also fall short. The difference is due at filing, sometimes with an underpayment penalty.
What happens if a deferred compensation plan misses a 409A rule?
The compensation can become includible in income, with interest and an additional tax equal to 20 percent of the amount under federal law. California conforms in general and adds an additional 5% tax plus interest.
Does California tax stock sales at a lower rate?
California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income, at rates that reach 12.3% on the 2025 schedules.
