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.
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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.
Use the RSU vesting tax calculator → · Model total compensation with RSUs →
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 |
Frequently Asked Questions
Yes. RSUs are taxed as ordinary income at vest, when shares become yours. Employers withhold federal supplemental wages (22% flat, or 37% above $1M/year in supplemental income) plus state tax and FICA.
Exercise ISOs in years when your other income is lower, exercise in smaller tranches, or hold shares long enough for qualifying disposition treatment. AMT is triggered when the spread exceeds your AMT exemption and regular tax liability.
NSOs are taxed as ordinary income at exercise with no AMT preference item, but they are simpler. ISOs can defer regular tax at exercise but may trigger AMT on the spread. The better choice depends on holding period, income level, and whether you plan to sell immediately.
The IRS flat supplemental rate is 22% for federal withholding on supplemental wages up to $1 million per year. Above $1 million in supplemental wages, the rate is 37%. State supplemental rules vary.