Equity Compensation Planning Guide
Equity Compensation and Tech Professional Financial Planning
Equity compensation is powerful but complex. RSU taxation, option exercise timing, concentration risk, and AMT exposure each require deliberate planning. Our guides cover every major equity compensation type and the tax decisions that go with them, reviewed by a CFP professional.
How should you plan your finances around equity compensation like RSUs and stock options, and what are the most common costly mistakes?
Equity compensation planning covers the tax and financial strategy decisions involved with RSUs, stock options, and ESPPs granted by an employer. The core decisions include when to exercise options and whether to hold or sell vested shares, how to manage concentration risk in a single employer's stock, how each equity type is taxed, how to avoid underwithholding on RSU income, and how equity fits into a broader diversified financial plan.
Start here Cornerstone
Building Wealth at a Tech Company: The Complete Financial Planning Guide
A complete financial planning guide for tech company employees with equity compensation. Learn how to handle RSUs, stock options, the AMT trap, and concentrated company stock without overpaying in taxes or carrying needless risk.
Frequently asked questions
How are RSUs taxed and why is my withholding often not enough?
RSUs are taxed as ordinary income at the time they vest, based on the full market value of the shares on the vesting date. Your employer withholds at the flat 22% federal supplemental rate, but if your total income lands you in a higher bracket, the withholding covers less than you actually owe.
What is the difference between ISOs and NQSOs?
Incentive Stock Options and Nonqualified Stock Options are taxed very differently. NQSOs create ordinary income equal to the spread between strike price and fair market value at exercise. ISOs trigger no regular income tax at exercise but can create an Alternative Minimum Tax liability.
What is concentration risk and how do I manage it with company stock?
Concentration risk is the financial danger of having too much of your net worth in a single stock, especially when that stock also represents your current employer, your future income, and your career. Exercising and selling company equity systematically over time is a common strategy for managing this risk.
How does an Employee Stock Purchase Plan work?
An Employee Stock Purchase Plan lets you buy company stock at a discount, typically 15%, using payroll deductions over an offering period. The discount and any additional gain may be taxed as ordinary income or capital gains depending on whether you hold the shares for the required qualifying period after purchase.
What is a 10b5-1 plan and who needs one?
A 10b5-1 plan is a pre-arranged schedule that allows corporate insiders to sell company shares at times they cannot otherwise trade due to possession of material nonpublic information. Once established, trades execute automatically according to the plan.
How is equity compensation reported on my taxes?
Equity compensation reported on a W-2 is included in your gross income and subject to federal income tax, Social Security tax, and Medicare tax. When you later sell vested shares, you have a second taxable event: a capital gain or loss measured from the vesting date market price.
Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland, serving families and business owners across Harford County and the Baltimore metro area.
Have equity compensation questions? Let's work through them.
Schedule a Fit Call to review your equity awards and build a plan around your total compensation.