Executive Summary
Equity compensation can complicate year-end tax planning because salary may be only part of your total income.
RSUs may have vested throughout the year. You may have exercised incentive stock options (ISOs) or non-qualified stock options (NSOs). You may already own shares from previous grants or exercises. Bonuses, investment income, stock sales, and other compensation can add another layer to your tax picture.
Year-end planning starts by taking inventory of the full picture. Understand the equity you currently hold, what vested or was exercised during the year, your company’s current stock price, your other income sources, and the taxes already withheld.
From there, tax projections can help you evaluate decisions before December 31. That could include whether to exercise stock options, sell vested shares, make an estimated tax payment, or split certain equity decisions between two tax years.
The goal is to know where you stand before year-end, even if some decisions remain unresolved.
What You Will Learn
- What to gather when reviewing your equity compensation before year-end
- Which equity decisions may need attention before December 31
- Common tax surprises with RSUs and stock options
- How to evaluate whether enough tax has been withheld during the year
- What to consider before exercising ISOs or NSOs
- Which life, career, and company changes may require you to revisit an existing equity strategy
- What to gather if you only have one hour to organize your equity compensation before year-end
Why You Should Read This
- Build a more complete picture of your income before the year ends
- Identify equity decisions that may have tax consequences
- Understand why RSU withholding may not reflect your eventual tax liability
- Prepare for conversations with your financial and tax professionals
- Recognize when an equity strategy created earlier in the year may need to change
- Organize the information needed to estimate your year-end tax situation
- Approach equity decisions as part of your broader financial picture rather than in isolation
Start With a Complete Inventory of Your Equity and Income
When reviewing equity compensation before year-end, start with a full inventory of what you have.
Start with RSUs, performance shares, ISOs, NSOs, ESPP shares, and company stock you already own. Then review equity that was exercised in previous years and RSUs that vested during the current year. Next, look at your company’s current stock price.
If you have stock options, compare the stock price with the option’s exercise price. The difference between the company’s stock price and the exercise price is known as the spread, which can become important when evaluating the tax implications of exercising options.
Equity is only part of the review. Include total compensation and other income for the year, including salary, bonuses, interest, and dividends. A complete inventory can help you decide whether you need to act before year-end or wait until the following year.
Know Which Decisions May Need to Happen Before December 31
Some equity decisions can affect the current tax year. For someone with stock options, one question may be whether to exercise ISOs or NSOs before December 31.
Someone with vested RSUs may also be considering whether to sell shares before year-end. Before deciding, review your broader tax situation, including RSU income, stock option activity, salary, bonuses, and other income.
This is where scenario planning becomes important.
For example:
What happens if you exercise no additional options this year?
What happens if you exercise a portion of them?
Could an ISO exercise trigger alternative minimum tax (AMT)?
Could exercising NSOs increase your ordinary income enough to move you into a higher tax bracket?
In some situations, consider completing part of a transaction before December 31 and another part after the new tax year begins to spread the tax impact across two years. Also, review the specific number of shares being sold rather than simply entering a dollar amount. Different lots may have different gains or losses based on when the shares vested or were acquired.
Three Common Equity Compensation Tax Surprises
One common mistake is exercising stock options without estimating the tax impact beforehand. Different exercises can create different tax consequences, so run tax estimates before deciding how many options to exercise.
The second common mistake involves RSU withholding. Employers usually withhold federal taxes at 22% when RSUs vest. For someone whose overall income puts them in a higher tax bracket, that withholding may not cover their eventual tax liability.
Let’s say someone is in a 37% federal tax bracket and had 22% withheld from their RSUs. That creates a 15-percentage-point gap on that RSU income.
The third mistake to watch for is selling company stock without reviewing the specific lots.
If shares vested at different times and prices, some lots may have gains while others may have losses. Reviewing the specific lots before selling can help you understand the tax impact of the shares you choose to sell.
How to Determine Whether Enough Tax Has Been Withheld
To understand whether withholding is on track, start with total compensation. A recent year-to-date pay stub can be a useful starting point, as it may show salary, bonuses, vested RSUs, and exercised NSOs.
Then account for other income that may be easy to overlook, including interest from a high-yield savings account and dividends or other income from non-retirement investment accounts. Next, review items that reduce taxable income, such as 401(k) contributions, HSA deductions, and certain benefit deductions.
ISO activity may require an additional review. Gather information about ISOs exercised during the year, including the spread, as well as gains or losses from any shares that were sold.
Together, this information can help you see more clearly how much tax you’ve already paid and what your eventual tax liability may look like.
Exercising ISOs and NSOs Requires Different Tax Considerations
ISOs and NSOs are subject to different tax rules, so knowing what type of option you hold is an important first step. Next, look at the spread at exercise.
Here is an example: if the fair market value of the stock is $100 and the exercise price is $50, the spread is $50 per option exercised.
That spread can factor into the alternative minimum tax (AMT) calculation. Run tax projections to determine whether a planned ISO exercise could result in AMT and whether exercising a different number of options could change that outcome.
NSOs work differently. The spread at exercise is added to ordinary income. That means exercising NSOs could increase taxable income and affect your tax bracket. Again, run different scenarios before deciding how many options to exercise.
There Is No Universal Percentage to Determine Company Stock Saturation
How much company stock is too much? No single percentage determines whether you have “too much” company stock. Instead, look at your entire financial picture.
That includes retirement accounts, non-retirement investments, company stock already owned, upcoming RSU grants, additional options you may exercise, and your financial goals.
Those goals can make a difference. Someone may be preparing to buy a home or investment property. Someone else may want to pay down high-interest debt.
The amount of company stock someone owns, what additional equity is expected in the future, their tax situation, and what they need their money to accomplish can all inform decisions about whether and when to sell shares.
Your Equity Strategy May Need to Change During the Year
An equity strategy created at the beginning of the year may not fit at the end. Several changes can prompt another review. A job change is one example. Depending on the terms of the stock option agreement, leaving a company may start a limited window to exercise certain options.
Changes in the company’s stock price can also affect the decision. This goes back to the spread example from earlier.
Additional bonuses or new RSU grants can increase compensation and potentially affect your tax withholding. An IPO, tender offer, or acquisition can also introduce additional decisions and potential taxable events.
Moving to another state may also require additional planning. Moving from a state with an income tax to one without does not necessarily mean that prior equity grants are completely disconnected from the former state for tax purposes. For example, equity granted while someone lived in California could still result in a portion of future vesting being treated as California taxable income if you move to a state like Texas, which has no state tax.
Two Client Stories Show Why Year-End Reviews Are Important
Equity Comp Advisor Chris Marrone shared two client situations that illustrate how changing circumstances can affect equity planning.
In the first, a client at a publicly traded company had a strong salary and bonuses and was in the 37% federal tax bracket.
During the year, the company’s stock price increased significantly. As the value of the client’s RSUs increased, so did the amount of RSU income. The federal withholding remained at 22%, creating a growing gap between that withholding and the client’s tax bracket.
The team used tax projections to assess the situation and determine whether the client was on track to incur an underpayment penalty. Chris explained that clients can make estimated tax payments directly to the IRS when they need to pay additional tax during the year.
His second example involved a client whose company stock price had fallen significantly. Because the stock price was lower, the spread between the stock price and the client’s option exercise price had narrowed. Chris and the client saw that period as an opportunity to exercise options with a smaller spread and, therefore, a smaller potential tax impact from the exercise.
The stock later recovered, and Chris said the shares could then be evaluated for a potential sale after meeting the applicable holding period for long-term capital gains treatment.
Both stories reinforce the same point: equity planning can change as income, taxes, and the company’s stock price change.
If You Only Have One Hour, Start Here
If you only have an hour to organize your equity compensation before year-end, you could start with your total income.
Gather:
- Your most recent year-to-date pay stub
- Your salary and bonuses for the year
- Information about RSUs that vested
- Information about NSOs exercised during the year
- Your equity compensation dashboard showing any ISO exercises
- The stock price and exercise price associated with ISO exercises so you can calculate the spread
- Brokerage statements showing company stock or other investments sold during the year
- Gains and losses associated with those sales
- Your expected income and compensation for the remainder of the year
Gathering these pieces can help you estimate your tax liability more accurately before the year ends.
Disclaimer: This is not formal tax, finance, or equity compensation advice. Please consult with a tax professional to learn more. This blog was created with AI help and edited by humans. Factual content is believed to be from reliable sources, but cannot be guaranteed. Laws relating to the content discussed may have changed since the article was written. Speak with a qualified professional before implementing any strategies or ideas discussed.
What You Learned
- Year-end equity planning starts with a complete inventory of your equity, income, and other compensation.
- Some equity decisions, including certain exercises and sales, may need to be evaluated before December 31.
- RSU withholding may not be enough to cover an employee’s eventual federal tax liability.
- Tax projections can help evaluate the potential impact of exercising ISOs or NSOs.
- Selling specific stock lots can produce different tax results depending on the gains or losses associated with those shares.
- No universal percentage determines how much company stock is appropriate for everyone.
- Job changes, stock price movements, new grants, bonuses, corporate events, and moves between states can all prompt a reevaluation of an existing equity strategy.
- A recent pay stub, equity dashboard, and brokerage statements can provide much of the information needed to begin a year-end review.
Now What?
Before the end of the year:
- Gather your most recent pay stub and equity compensation documents.
- Review what RSUs vested and what stock options you exercised.
- Account for salary, bonuses, investment income, and other compensation.
- Review company stock you sold and the gains or losses associated with those sales.
- Identify any additional equity decisions you are considering before December 31.
- Estimate what your income may look like through year-end.
- Work with your financial and tax professionals to run tax projections before making year-end equity decisions.
