Equity Compensation

Core Concepts

Restricted Stock Units (RSUs)

RSUs are a promise of shares delivered at vesting. There is no election to make and no exercise decision:

• Taxation: Full FMV of shares at vest is ordinary income (W-2 wages), subject to income tax, Social Security (up to the wage base), and Medicare. Cost basis = FMV at vest; holding period starts at vest.
• Withholding shortfall trap: Employers withhold federal tax on RSU income at the flat supplemental wage rate — 22% on supplemental wages up to $1 million cumulative for the year, with a mandatory 37% rate on the excess above $1 million (rates as of 2026, tied to statutory brackets — verify current). A client whose actual marginal rate is 32-37% is systematically under-withheld and can face a large April balance due plus underpayment penalties. Plan estimated payments or extra withholding in vest years.
• Post-vest decision: Holding vested RSU shares is economically identical to buying employer stock with a cash bonus. The default recommendation is sell-at-vest unless there is a deliberate concentration thesis; there is no tax benefit to holding beyond starting the capital gains clock.

Nonqualified Stock Options (NSOs)

• At exercise: Spread (FMV − strike) × shares is ordinary income (W-2 for employees), with payroll tax and withholding. Basis = FMV at exercise; subsequent gain/loss is capital.
• No AMT preference — NSO taxation is entirely in the regular system.
• Exercise timing is a bet on rate arbitrage and appreciation: early exercise moves future appreciation from ordinary income to capital gains but accelerates tax and concentrates risk.