Equity Compensation Tax Guide for $150k+ Employees

A California employee in the top bracket who vests $200,000 of restricted stock units keeps roughly $97,000 of it. The other $103,000 goes to the IRS, the Franchise Tax Board, and Medicare before the shares ever clear settlement. That gap — between the number on the vesting confirmation and the number that lands in a brokerage account — is the single most misunderstood figure in equity compensation, and it widens precisely as income rises into the range where equity becomes a meaningful share of total pay.

Equity grants are sold to employees on gross face value. They are taxed on a schedule that no offer letter explains. This analysis quantifies the difference across the four instruments that dominate compensation at the $150k+ level — restricted stock units (RSUs), incentive stock options (ISOs), non-qualified stock options (NSOs), and the employee stock purchase plan (ESPP) — using verified 2026 federal and California rates, and computes a single comparable yield figure for each.

The numbers most offer letters never show

Sources: IRS Rev. Proc. 2025-32 and IRS 2026 inflation adjustment release; CA FTB 2025 rate schedule; SSA 2026 wage base announcement. Yield figure computed below.

The last row is the one worth sitting with. Half of a top-bracket California RSU vest is gone before the employee makes a single decision about what to do with the shares. Equity compensation gets discussed as upside. At these income levels, the more accurate frame is that the government is a silent co-owner taking just over half the position at every vesting event.

RSUs: taxed as ordinary income at vest, full stop

RSUs carry the least optionality and the heaviest immediate tax. The fair market value at the vest date multiplied by shares vested equals ordinary income at vest — reported on the W-2, withheld on like salary. There is no exercise decision, no holding-period election, no way to defer the event. The shares vest, the income lands, the tax is due.

Consider a top-bracket California single filer vesting 1,000 shares at an $85 fair market value — $85,000 of ordinary income. Federal tax at 37% is $31,450. California at 13.3% adds $11,305. The shares vest after the employee has already crossed the $184,500 Social Security wage base and the $200,000 Additional Medicare threshold, so the Medicare layer applies at 2.35%, or $1,998. Total tax: $44,753. Net: $40,247.

That produces a Finluxy Equity After-Tax Yield of 47.3% — the employee keeps under half of the stated grant value. The Cluster’s own illustrative example landed near 48% using a flat 1.45% Medicare assumption; layering in the Additional Medicare tax that applies to virtually every $150k+ earner pushes the real figure lower. Anything that happens to the share price after vest is a separate capital gains question, measured from the vest-date cost basis — a point most equity holders miss, and the reason a clear-eyed vest and sell versus hold decision matters more than the vest itself.

For employees outside California the picture improves materially. Strip the 13.3% state layer and the same vest nets roughly $51,552 — a yield near 60.6%. The 13-point gap between a California and a Texas RSU on identical stock is not a rounding error; it is the entire reason California’s RSU tax burden drives relocation math for high earners.

ISOs: the deferral that the AMT quietly claws back

Incentive stock options invert the RSU problem. There is no tax at grant and no regular tax at exercise. Meet both holding periods — two years from grant and one year from exercise — and the entire gain converts to long-term capital gain. On paper, the cleanest instrument in the stack.

The catch sits in the parallel tax system. The spread between exercise price and FMV at exercise is an AMT preference item. It does not appear on a regular-tax return, but it flows directly into alternative minimum taxable income. For 2026 the AMT exemption is $90,100 for single filers, and under the One Big Beautiful Bill Act the exemption now phases out at 50 cents per dollar once AMTI crosses $500,000 — double the previous phaseout speed, beginning at a lower threshold. The practical effect: a large ISO exercise can manufacture an AMT bill in a year with no actual sale and no cash generated to pay it.

Take 10,000 ISOs with a $5 strike exercised when the FMV is $35. The spread is $300,000 — zero regular tax, but $300,000 of AMT preference. For a single filer already near the top brackets, that spread taxed at the 28% AMT rate approaches $84,000 of tentative minimum tax, much of which becomes an actual AMT liability owed in April. The shares are still unsold. This is the scenario where AMT risk on incentive stock options turns a paper win into a cash crisis, and it is the precise reason the tax cost of ISOs versus NSOs cannot be judged from the headline rate alone.

If the holding periods are met and the stock is later sold as a qualifying disposition, the full gain is long-term capital gain — 23.8% combined federal at the top, including the 3.8% net investment income tax, plus California’s 13.3% (the state does not distinguish long-term gains from ordinary income). Miss the holding period and it becomes a disqualifying disposition: the spread at exercise reverts to ordinary income, and the deferral advantage evaporates entirely.

NSOs: ordinary income on the spread, plus FICA

Non-qualified stock options offer no AMT relief and no holding-period conversion at exercise. The spread between exercise price and FMV at exercise is ordinary income the moment the option is exercised — W-2 income for employees, with FICA applied on top. That FICA layer is the structural difference from ISOs: the same spread that is an AMT preference item under an ISO is straightforward wage income, Medicare-taxed, under an NSO.

Run the same 10,000 options at a $5 strike and $35 FMV — a $300,000 spread. Federal ordinary tax at 37% is $111,000. California at 13.3% adds $39,900. Medicare at 2.35% (the earner is well past every wage-base cap) adds $7,050. Total tax at exercise: $157,950 on a $300,000 spread, before the shares are sold. Net spread retained: $142,050.

The Finluxy Equity After-Tax Yield on that exercise spread is 47.4% — nearly identical to the RSU figure, which is the point. For a fully-taxed California top-bracket earner, RSUs and NSOs converge: both are ordinary income, both carry the full federal-plus-state-plus-Medicare stack, and both net under half. The ISO’s theoretical advantage only materializes if the holding periods are met and AMT does not consume the benefit in the interim. Any post-exercise appreciation on the NSO shares is then a separate capital gains clock from the exercise-date basis.

ESPP: the one place the discount is the whole return

The ESPP is the smallest instrument by dollar value and the most favorable by tax mechanics. A qualified Section 423 plan permits a discount of up to 15%, capped at $25,000 of grant-date fair market value per calendar year — a statutory limit set in 1964 and never indexed to inflation. Hold for a qualifying disposition (two years from the offering date, one year from purchase) and only the lesser of the offering-date discount or the actual gain is ordinary income; the rest is long-term capital gain.

The structural advantage most coverage understates: qualified §423 ESPP shares are exempt from FICA even on a disqualifying disposition. No Social Security, no Medicare, no Additional Medicare on the discount. For a $150k+ earner who has maxed every wage base, that exemption is worth a clean 2.35% relative to RSU or NSO income of the same character.

On a maxed $25,000 ESPP purchase at a 15% discount, the immediate built-in gain is roughly $3,750. In a qualifying disposition that discount is taxed as ordinary income, but the FICA exemption and the long-term treatment on subsequent appreciation make it the highest-yielding equity instrument in the set. The cost and benefit of the ESPP discount is small in absolute dollars and large in after-tax efficiency — the inverse of how most employees rank their grants.

The Finluxy Equity After-Tax Yield, side by side

The yield collapses four different tax schedules into one comparable number: net after-tax proceeds as a percentage of pre-tax fair market value at the event date. Higher marginal and state rates push it down; FICA exemptions and capital-gains conversion push it up.

Sources: IRS Rev. Proc. 2025-32; CA FTB 2025 rate schedule; SSA 2026 wage base; IRC §423. *ISO figure assumes both holding periods met and no AMT liability at exercise — combined 23.8% federal LTCG (incl. 3.8% NIIT) plus 13.3% CA on a fully-appreciated spread; AMT at exercise, if triggered, can erase this advantage temporarily and is modeled separately. RSU/NSO yields reflect the 2.35% Medicare layer applicable above the Additional Medicare threshold.

The 26-point spread between an ISO that clears its holding periods cleanly and an NSO on identical economics is the entire case for incentive stock options. It is also entirely conditional. Strip the holding-period success or add an AMT bill at exercise and the ISO collapses toward the NSO’s yield. The instruments are not different in kind at the top of the stack — they are different in how much tax-planning discipline the holder is willing to absorb.

What the data shows that most coverage misses

Equity tax content overwhelmingly frames the choice as RSU versus options, or qualified versus non-qualified. The yield numbers say the more important variable is not the instrument — it is the FICA and Medicare layer that compounds at exactly the income level where equity matters most. For a $150k+ earner who has already cleared the $184,500 Social Security wage base and the $200,000 Additional Medicare threshold, every dollar of ordinary-income equity carries a 2.35% Medicare charge that a $90,000 earner pays at a lower effective weight and a wage-base-protected rate. The ESPP’s FICA exemption is the only structural escape, and it applies to the smallest grant most employees receive.

Put differently: the tax code penalizes equity most heavily for the people most likely to receive large amounts of it, and the one instrument that dodges the penalty is the one capped at $25,000 a year. That inversion — favorable treatment concentrated in the smallest vehicle — is invisible if you only look at headline marginal rates and never compute yield on the full stack.

Methodology

What this means for a $150k+ household

The decision that moves the most money is not which grant to accept — it is when to recognize income and where to be a resident when it lands. A top-bracket California earner keeps roughly 47 cents of every RSU dollar and 73 cents of every cleanly-executed ISO dollar; the 26-point difference is worth optimizing toward only if the household has the cash to fund a potential AMT bill at exercise and the discipline to hold through both periods. Households without that liquidity should treat ISOs as NSOs in their planning and not chase a yield they cannot safely capture.

Three thresholds deserve standing attention at this income level. The $184,500 Social Security wage base and $200,000 Additional Medicare threshold are typically crossed early in the year by salary alone, meaning equity vesting later in the year faces the full Medicare layer — a reason to model vest timing rather than treat it as fixed. The AMT phaseout beginning at $500,000 of AMTI, accelerated to 50% under current law, makes large ISO exercises far more likely to generate cash AMT than they were two years ago. And for concentrated positions, coordinating sales through a 10b5-1 plan’s tax timing separates the diversification decision from the blackout calendar. For employees holding pre-IPO equity, the same yield math compounds with valuation uncertainty — the tax cost of equity awards at IPO and the mechanics of private company stock option valuation deserve their own modeling before any exercise. None of this replaces a conversation with a tax advisor who can see your full return, but walking into that conversation already knowing your yield by instrument is what turns it from an explanation into a decision.