Taxes
Zoe Team and Michael Holloway, CFP® (Zoe Network Advisor)
7 min read
Understand your equity compensation type, such as stock options or RSUs, as they have different tax treatments.
Plan for liquidity events to cover potential tax liabilities associated with exercising options or vesting shares.
Strategize the timing of exercises and sales to optimize your overall tax burden.
No. RSUs are generally taxed as ordinary income upon vesting, whereas stock options may have different tax triggers when exercised.
The ideal time depends on your tax situation, financial goals, and the performance of the underlying stock. Consult a tax professional.
Tax strategies exist, such as holding shares for long-term capital gains, but they depend heavily on your specific plan and compensation type.
How do employers use retention tools to promote loyalty and access? One of the ways is equity compensation. While the benefits of equity compensation can be significant, they can lead to unexpected tax consequences and make it challenging to fully understand your compensation package as an employee.
How do employers use retention tools to give their key employees “skin in the game”? One of the ways is offering company equity to promote loyalty and access. While the benefits of equity compensation can be significant, they can lead to unexpected tax consequences and make it challenging to fully understand your compensation package as an employee.
If you own equity, planning and managing it is key to your financial plan and should be one of your financial priorities. Ultimately, it will allow you to keep as much of your income as possible, while mitigating the risk of being overly concentrated. Having your skin in the game includes knowing how to play it. A helpful starting point is to look at some of the most common methods of equity compensation and understand how they may apply to you.
Often referred to as RSUs, restricted stock units are an increasingly popular form of equity compensation. These stock-based compensations help retain employees (and keep them motivated) by giving them a vesting schedule. This incentivizes them to stay at the company, contributing to its success for longer.
There are two key dates when it comes to RSUs: The grant date and the vesting dates. When the company grants you shares, you don’t owe an immediate tax. However, as they vest, the shares are taxed as ordinary income and reported as W-2 income based on the share value on that date.
Here is one of the common vesting schedules: If you are granted 1,000 shares of company stock on January 1, 2022, with a 4-year vesting schedule, 250 shares would vest and be taxed as income on your paycheck (on January 1, each of the next four years). In most cases, a portion of the shares is automatically sold for withholding at the flat IRS rate for supplemental wages (22% up to $1MM in income, 37% over $1MM).
Unexpected tax liabilities can be caused when the time to file taxes comes around. This is because people who make less than $1MM in income, have a tax bracket higher than 22%.
The are a few important factors, such as the size of your existing position in company stock, whether you have additional grants coming to further participate in company growth, and if your current cash reserve could use replenishing.
Selling your shares immediately upon vesting allows you to essentially treat the vesting like a cash bonus. Since the basis is set at vesting, you have already been taxed on the income and will typically owe little or no capital gains.
Let’s dive deeper. Vesting is taxed just the same as cash income. Determining your best course of action can often be determined by answering one simple question: if this were a cash bonus, would you use it to buy company stock?
If the answer is yes, hold on to the shares and set aside any cash necessary for a shortfall in withholding. Otherwise, it may make sense to sell the shares and use the proceeds to refill your cash reserves, pay off debts carrying a high-interest rate, or integrate them into a diversified portfolio.
Equity compensation management may also include ESPPs (Employee Stock Purchase Plans), which are other common methods used by employers to keep their employees engaged. This method allows employees to purchase shares of company stock at a discount, typically in the range of 10-15%. The maximum allowable contribution is $25,000 per year, which is typically processed as an after-tax payroll deduction. In other words, it’s not deducted from your income like a 401(k) contribution.
The discount on the purchase price is the main advantage of this plan and the reason why it is almost always advisable to participate.
Calculating taxes is where equity compensation gets complicated. The sale of shares purchased through an ESPP is taxed in one of two ways, either as a qualifying disposition or a non-qualifying disposition.
Ordinary income tax on the lesser of:
Discount offered based on offering date price.
Gain calculated using actual purchase price and final sale price.
Long-term capital gains on the difference between purchase and sale prices.
Ordinary income tax is based on the difference between the purchase price and the market price on the purchase date.
Capital gains on the remainder (can be long or short-term depending on the holding period).
The criteria for a qualifying disposition are met when the shares are held at least one year from the purchase date and two years from the offering date. The details of the taxation above can be challenging, but the main takeaway is that if the shares appreciate, a qualified disposition will allow a larger portion of the sale to qualify for long-term capital gains treatment and less ordinary income. As with most stock purchases, ESPP participation is often best viewed as a long-term investment.
The last common equity compensation method is incentive stock options or ISOs. These options are offered only to employees and are subject to a vesting schedule where individuals can receive capital gains treatments based on the holding period.
Unlike the ESPP, there is no upfront cash required from the employee, and no tax is incurred until the shares are sold. In this scenario, if you are granted 1,000 shares on a 4-year vesting schedule, you have the option to purchase 250 shares each subsequent year at the grant price. If the company has a strong year, the shares could be worth significantly more than when they were granted, and the options are considered “in the money”.
Most plans offer the option to do a cashless exercise, which simply means the shares are immediately sold upon exercise, giving you two options at vesting: take your cash now and pay ordinary income tax on the gain, or buy the shares with your own cash and start the clock to qualify for long-term capital gains treatment.
While fewer people are impacted by Alternative Minimum Tax under the current tax law, it is also important to note that the spread between your exercise price and the fair market value of the stock can be subject to AMT.
The decision often comes down to your current cash needs, size of your position in company stock, personal tax situation, and risk appetite. For example, an individual in the 35% tax bracket with a sufficient cash reserve may be much more inclined to hold the shares than someone in the 22% bracket with high-interest debts to pay or limited cash on hand.
There are various ways that companies can spice up their compensation packages using equity, and when properly planned for, it can be very advantageous for the employee. Although every situation is different, the most important key takeaways include planning ahead, ensuring that your tax liability is accounted for, and fully understanding the risks involved in your decisions.
The benefit of giving equity to the employee is that if the value of the stock increases, so does the payout to the employee. This is a strong motivator for employees to work harder and contribute to the growth of the business.
It’s also beneficial for the employer since it helps them retain employees for longer periods of time.
Exploring equity compensation management with a financial advisor is the best way to know how to play the game and become an expert at it. Find a financial advisor that will work with you to understand these employee benefits that can contribute to your investments if managed properly.
How do employers use retention tools to promote loyalty and access? One of the ways is equity compensation. While the benefits of equity compensation can be significant, they can lead to unexpected tax consequences and make it challenging to fully understand your compensation package as an employee.
How do employers use retention tools to give their key employees “skin in the game”? One of the ways is offering company equity to promote loyalty and access. While the benefits of equity compensation can be significant, they can lead to unexpected tax consequences and make it challenging to fully understand your compensation package as an employee.
If you own equity, planning and managing it is key to your financial plan and should be one of your financial priorities. Ultimately, it will allow you to keep as much of your income as possible, while mitigating the risk of being overly concentrated. Having your skin in the game includes knowing how to play it. A helpful starting point is to look at some of the most common methods of equity compensation and understand how they may apply to you.
Often referred to as RSUs, restricted stock units are an increasingly popular form of equity compensation. These stock-based compensations help retain employees (and keep them motivated) by giving them a vesting schedule. This incentivizes them to stay at the company, contributing to its success for longer.
There are two key dates when it comes to RSUs: The grant date and the vesting dates. When the company grants you shares, you don’t owe an immediate tax. However, as they vest, the shares are taxed as ordinary income and reported as W-2 income based on the share value on that date.
Here is one of the common vesting schedules: If you are granted 1,000 shares of company stock on January 1, 2022, with a 4-year vesting schedule, 250 shares would vest and be taxed as income on your paycheck (on January 1, each of the next four years). In most cases, a portion of the shares is automatically sold for withholding at the flat IRS rate for supplemental wages (22% up to $1MM in income, 37% over $1MM).
Unexpected tax liabilities can be caused when the time to file taxes comes around. This is because people who make less than $1MM in income, have a tax bracket higher than 22%.
The are a few important factors, such as the size of your existing position in company stock, whether you have additional grants coming to further participate in company growth, and if your current cash reserve could use replenishing.
Selling your shares immediately upon vesting allows you to essentially treat the vesting like a cash bonus. Since the basis is set at vesting, you have already been taxed on the income and will typically owe little or no capital gains.
Let’s dive deeper. Vesting is taxed just the same as cash income. Determining your best course of action can often be determined by answering one simple question: if this were a cash bonus, would you use it to buy company stock?
If the answer is yes, hold on to the shares and set aside any cash necessary for a shortfall in withholding. Otherwise, it may make sense to sell the shares and use the proceeds to refill your cash reserves, pay off debts carrying a high-interest rate, or integrate them into a diversified portfolio.
Equity compensation management may also include ESPPs (Employee Stock Purchase Plans), which are other common methods used by employers to keep their employees engaged. This method allows employees to purchase shares of company stock at a discount, typically in the range of 10-15%. The maximum allowable contribution is $25,000 per year, which is typically processed as an after-tax payroll deduction. In other words, it’s not deducted from your income like a 401(k) contribution.
The discount on the purchase price is the main advantage of this plan and the reason why it is almost always advisable to participate.
Calculating taxes is where equity compensation gets complicated. The sale of shares purchased through an ESPP is taxed in one of two ways, either as a qualifying disposition or a non-qualifying disposition.
Ordinary income tax on the lesser of:
Discount offered based on offering date price.
Gain calculated using actual purchase price and final sale price.
Long-term capital gains on the difference between purchase and sale prices.
Ordinary income tax is based on the difference between the purchase price and the market price on the purchase date.
Capital gains on the remainder (can be long or short-term depending on the holding period).
The criteria for a qualifying disposition are met when the shares are held at least one year from the purchase date and two years from the offering date. The details of the taxation above can be challenging, but the main takeaway is that if the shares appreciate, a qualified disposition will allow a larger portion of the sale to qualify for long-term capital gains treatment and less ordinary income. As with most stock purchases, ESPP participation is often best viewed as a long-term investment.
The last common equity compensation method is incentive stock options or ISOs. These options are offered only to employees and are subject to a vesting schedule where individuals can receive capital gains treatments based on the holding period.
Unlike the ESPP, there is no upfront cash required from the employee, and no tax is incurred until the shares are sold. In this scenario, if you are granted 1,000 shares on a 4-year vesting schedule, you have the option to purchase 250 shares each subsequent year at the grant price. If the company has a strong year, the shares could be worth significantly more than when they were granted, and the options are considered “in the money”.
Most plans offer the option to do a cashless exercise, which simply means the shares are immediately sold upon exercise, giving you two options at vesting: take your cash now and pay ordinary income tax on the gain, or buy the shares with your own cash and start the clock to qualify for long-term capital gains treatment.
While fewer people are impacted by Alternative Minimum Tax under the current tax law, it is also important to note that the spread between your exercise price and the fair market value of the stock can be subject to AMT.
The decision often comes down to your current cash needs, size of your position in company stock, personal tax situation, and risk appetite. For example, an individual in the 35% tax bracket with a sufficient cash reserve may be much more inclined to hold the shares than someone in the 22% bracket with high-interest debts to pay or limited cash on hand.
There are various ways that companies can spice up their compensation packages using equity, and when properly planned for, it can be very advantageous for the employee. Although every situation is different, the most important key takeaways include planning ahead, ensuring that your tax liability is accounted for, and fully understanding the risks involved in your decisions.
The benefit of giving equity to the employee is that if the value of the stock increases, so does the payout to the employee. This is a strong motivator for employees to work harder and contribute to the growth of the business.
It’s also beneficial for the employer since it helps them retain employees for longer periods of time.
Exploring equity compensation management with a financial advisor is the best way to know how to play the game and become an expert at it. Find a financial advisor that will work with you to understand these employee benefits that can contribute to your investments if managed properly.
Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.
Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.
The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.
Explore the Zoe Wealth Platform with AI
Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.
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support@zoefin.com
666 Third Ave, 6th Floor
New York, NY, 10017
Copyright © 2026 Zoe Financial, Inc. | All rights reserved
Find an Advisor
Retirement Planning
Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.
The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.
Explore the Zoe Wealth Platform with AI
Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.
(646) 680-9244
support@zoefin.com
666 Third Ave, 6th Floor
New York, NY, 10017
Copyright © 2026 Zoe Financial, Inc. | All rights reserved
Find an Advisor
Retirement Planning
Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.
The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.
Explore the Zoe Wealth Platform with AI
Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.
(646) 680-9244
support@zoefin.com
666 Third Ave, 6th Floor
New York, NY, 10017
Copyright © 2025 Zoe Financial, Inc. | All rights reserved
