2026 equity tax guide
Equity Compensation Tax Guide 2026: RSUs, ISOs, and NSOs Explained
Tech workers with equity compensation face tax rates significantly higher than their W-2 salary alone. RSU vesting triggers 22%+ federal withholding immediately. ISO exercise may trigger AMT. NSO exercise is taxed as ordinary income. This guide explains each scenario with exact calculations from the ExactTakeHome engine.
Section 1: RSU Vesting — What Actually Gets Withheld
Restricted stock units (RSUs) are taxed when they vest — the moment shares are delivered to you. Your employer treats the vesting value as supplemental wages and withholds federal tax at the flat supplemental rate, plus state income tax and FICA.
Example (engine-calculated): 100 shares vesting at $500/share = $50,000 income. Federal withholding: $11,000 (22% supplemental rate). Total withholding: $19,629. Net deposit: $30,371.
Section 2: ISO Exercise — The AMT Trap
Incentive stock options (ISOs) do not trigger regular income tax at exercise. However, the spread between fair market value and exercise price is an Alternative Minimum Tax (AMT) preference item.
Example (engine-calculated): 1,000 shares exercised at $10 with $50 FMV = $40,000 spread. The 2026 AMT exemption for single filers is $137,000. Estimated AMT: $780. AMT may not apply at this income level.
Section 3: NSO Exercise — Ordinary Income
Non-qualified stock options (NSOs) are taxed as ordinary income at exercise. The spread is subject to federal supplemental withholding, state income tax, and FICA (Social Security up to the wage base, plus Medicare).
Example (engine-calculated): Same 1,000-share scenario with $40,000 spread. Federal withholding: $8,800. FICA: $3,060. Net after all taxes: $23,528.
Section 4: Comparing the Three on a $50,000 Event
| Type | Tax treatment | Total tax / withholding | Net after tax |
|---|---|---|---|
| RSU vest ($50,000) | Ordinary income + supplemental withholding | $19,629 | $30,371 |
| ISO exercise ($40,000 spread) | AMT preference item (no regular tax at exercise) | $780 est. AMT | Deferred until sale |
| NSO exercise ($40,000 spread) | Ordinary income + FICA | $16,472 | $23,528 |
| W-2 salary ($50,000) | Regular withholding (CA) | $9,607 | $40,393 |