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Tax work for high earners with equity compensation

Your W-2 shows one number, and your stock plan quietly created several more. The gap between them is where the surprise bills come from.

Equity compensation turns a salary into a calendar of tax events. Shares vest in March, a bonus lands in the same quarter, the employee stock purchase plan buys in June, and some of it is withheld at a rate that has little to do with what you will really owe. The result is a return that is correct on every form and still wrong at the bottom.

I do the work myself, and for this kind of return the useful part is the planning, which has to happen before the shares vest, not after the W-2 arrives.

RSUs: taxed at vest, withheld too lightly

Restricted stock units are ordinary income when they vest, at the fair market value on that day, and the employer withholds federal income tax from them at the flat supplemental rate of 22%, or 37% on supplemental wages above $1 million in a year. If your marginal rate is 32%, 35%, or 37%, 22% leaves a gap, and it is invisible until April. The fix is a mix of an extra W-4 withholding or an estimated payment, sized in the same year as the vest. After vesting, the shares have a basis equal to the income already taxed, and any later change in price is a capital gain or loss.

Options: where the AMT lives

A nonqualified stock option is ordinary income on the spread at exercise. An incentive stock option is not taxed for regular tax at exercise but the spread is an adjustment for the alternative minimum tax, which can produce a real bill on money you have not sold. A qualifying disposition needs the shares held more than one year after exercise and more than two years after the grant. Exercising ISOs and holding them is a decision that deserves a projection, not a hunch, because the AMT credit it creates may be recovered only slowly.

The mistake that costs people twice

When you sell shares your plan delivered, the brokerage’s Form 1099-B often reports the basis as the price you paid and leaves out the compensation already taxed on your W-2. Enter it as-is and you are taxed on the same income twice. The correction is a basis adjustment on Form 8949, and it is the single most common error I see on these returns. It is also a place where software does not help you, because the software trusts the form.

What usually lands on this kind of return

Form 8949 with the basis corrected for compensation already reported on the W-2
Form 6251 for any AMT from ISO exercises, and Form 8801 for the credit that follows
ESPP treatment: whether a sale is a qualifying disposition decides how much is ordinary income
The 3.8% net investment income tax on investment income above the MAGI threshold
Additional Medicare tax on wages above the threshold, and whether it was withheld correctly
Multi-state sourcing of equity income for anyone who moved or worked in more than one state between grant and vest
Retirement contributions, backdoor Roth rules, and charitable giving of appreciated stock instead of cash
Concentrated-position planning: spreading a sale across years, or deciding when not to sell

What a planning conversation covers

A good one happens twice a year. Early in the year it maps your vest and purchase dates, sizes withholding, and decides whether any option exercise makes sense. Late in the year it projects where you are, so December decisions are made with a number in front of you. Both fit inside a tax planning engagement, and the price is a flat fee set by the complexity of the return and quoted before work starts.

Questions, answered plainly.

My RSUs were withheld at 22%. Is that enough?

Only if your marginal bracket is 22% or lower. For most people with a high salary plus vesting stock it is not, and the difference is due in April, sometimes with an underpayment penalty. I would size an extra withholding amount or an estimated payment against a projection.

Should I exercise my ISOs this year?

That depends on the spread, your other income, and your tolerance for holding concentrated stock. A projection of regular tax against AMT tells you the cost of exercising before you do it. I run that projection and you decide with a number in hand.

Is my 1099-B wrong?

Often not wrong, but incomplete. It may not include compensation already taxed on your W-2. If the basis on the form looks lower than what you paid in tax terms, ask before you file.

I moved states during the year. Who taxes my stock income?

Equity income is usually sourced by where you worked between grant and vest, which can mean several states claim a share. It is routine work, but it needs the grant and vest dates, which is why I ask for the plan documents early.

The first conversation is free.

Tell me what's going on and I'll tell you plainly whether you need me.

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