Avoid Tax Surprises RSUs ISO AMT Planning ESPPs

Equity awards can build real wealth for tech employees, but they also create tax traps that show up at filing time. This guide breaks down how RSUs, ISOs, and ESPPs are taxed, where people get surprised such as AMT and wash sales, and practical steps a CPA can use to time exercises and sales, adjust withholding, and plan estimates so you keep more of what you earn.

Why equity taxes surprise people

Company stock awards are not taxed the same way as salary. RSUs are taxed when they vest, not when you sell. ISOs can trigger Alternative Minimum Tax even when you do not receive cash. ESPP purchases can be tax efficient, but later sales and wash sales change outcomes. Add underwithholding on supplemental wages, multi state work history, and broker statements that often show the wrong cost basis, and it is easy to see why many smart people still face a large balance due or penalties.

The good news is that most surprises are avoidable. With a plan that covers timing, withholding, estimated payments, and documentation, you can convert equity pay into a predictable outcome.

RSUs: how the tax actually works

Restricted Stock Units create taxable wage income at vest. The fair market value of the shares delivered on the vest date is added to your Form W 2 wages and is subject to federal income tax, state income tax if applicable, and payroll taxes. Companies usually withhold taxes by either reducing the shares delivered to you or by selling a portion of the shares. That withholding uses supplemental wage rules which often apply a flat federal rate. If your marginal rate is higher, the default withholding can be too low.

After vest, you own the shares. Any change in value from vest to the eventual sale is capital gain or loss. For taxes on the sale you will receive a Form 1099 B from your broker. Your cost basis is the amount already included in wages at vest. Many broker statements omit this wage component and show a lower basis, sometimes even zero. If you use that uncorrected basis you will pay tax twice on the same dollars. A CPA will reconcile the vesting records and correct the basis on Form 8949 so only the post vest change is taxed again.

Dividends paid on RSUs before vest are usually paid as cash through payroll and taxed as wages. Dividends paid after you own the shares are generally taxable as dividends. Turning off automatic dividend reinvestment can prevent accidental wash sales when you later sell at a loss.

RSUs generally are not eligible for an 83 b election because there is no property transferred before vest. Once RSUs vest, you can donate appreciated shares to charity and potentially receive a deduction while avoiding capital gains on the appreciation since vest, subject to the usual rules for gifts of stock.

RSU tax withholding strategies

Default withholding on RSU vests is designed to be simple for payroll, not precise for your personal tax rate. That gap often leads to a balance due and an underpayment penalty. The following approach helps match withholding to your real tax:

First, estimate your total RSU income for the year based on scheduled vests and a reasonable stock value. Model your household tax rate with that RSU income included. Compare that to the flat supplemental rate used by payroll. The difference guides how much additional withholding or estimated tax you need.

Second, choose the right settlement method for each vest. Sell to cover is common, but it only covers the default payroll withholding. If you are a higher bracket taxpayer or live in a high tax state, consider selling more shares at vest to raise cash for additional withholding or an estimated payment. Some companies allow you to request a higher voluntary withholding on supplemental wages through your payroll profile. When that is available, it is often the cleanest way to close the gap.

Third, use the special timing benefit of withholding. Tax withholding taken from a paycheck is treated as if it were paid evenly throughout the year, even if it occurs late in the year. If you discover underpayment in the fall, increasing payroll withholding on a late year paycheck can reduce or eliminate penalties for earlier quarters. Estimated tax payments do not receive this benefit and are counted on the date paid. A CPA can coordinate the mix of added payroll withholding and any remaining estimates to hit penalty safe harbors.

Finally, keep documentation. Save the vesting confirmations, pay stubs that show RSU withholding, and the broker trade confirms. With these, your CPA can correct cost basis on Form 8949 and defend the numbers if the IRS asks questions.

ISOs: benefits and AMT

Incentive Stock Options deliver a powerful tax result when handled correctly. If you exercise and hold the shares long enough, you can convert what looks like wage income into long term capital gain. A qualifying disposition requires you to hold the stock at least two years from the grant date and at least one year from the exercise date. Meet those holding periods and the entire spread from exercise price to sale price is capital gain on your regular return.

The tradeoff is AMT. The bargain element at exercise, which is the difference between fair market value and the exercise price, is added to Alternative Minimum Tax income. Large exercises late in the year with a strong stock price can create a sizable AMT bill without any cash proceeds. If you then sell later for less than the exercise value, you can be left with an AMT credit you hope to use in future years.

Your AMT picture is reported on Form 6251 and the Minimum Tax Credit is tracked on Form 8801. Some states have their own AMT rules. A year by year projection is the right way to decide how much to exercise and whether to hold or sell.

ISO AMT planning that actually works

Plan your ISO exercises with the AMT in mind, not after the fact. Here is a practical framework a CPA uses with clients.

Set an annual AMT budget. Forecast your household income and deductions, then add various levels of ISO exercise to see how much AMT that creates. Aim for an exercise amount that keeps AMT manageable while still starting the one year holding period clock. Spreading exercises across multiple years is often better than one large exercise that pushes AMT very high.

Exercise early in the year when possible. If the share price falls below your exercise value later that same year, you can sell before year end. An exercise and sale in the same calendar year is a disqualifying disposition that causes the ISO to be taxed like a nonqualified option on your regular return and removes the AMT preference. This gives you a chance to protect cash flow if the stock weakens.

Hold through the year end only when you can tolerate the AMT and the price risk. If you keep shares past year end, AMT can be due even if you never sell. When the one year post exercise holding period completes and market conditions are favorable, a qualifying sale converts the spread to capital gain and begins the process of recovering AMT through the credit mechanism. A CPA will track both regular tax basis and AMT basis so your future sales unlock the credit properly.

Mind liquidity. AMT is a tax on paper gains. If you plan to exercise and hold, set aside cash for potential AMT or plan staged sales of other assets. Some employees exercise just enough to stay near an AMT threshold. Others pair ISO exercises with charitable gifts of appreciated shares to manage regular tax while controlling AMT.

ESPPs: tax rules that matter

Qualified ESPPs under Section 423 allow you to buy company stock at a discount, often up to 15 percent, sometimes with a lookback that applies the discount to the lower of the price at the start or end of the offering period. You generally do not owe tax at purchase. Tax is owed when you sell and the character depends on how long you hold.

A qualifying disposition means you sell at least two years after the grant date and at least one year after the purchase date. In a qualifying sale, a portion equal to the discount based on the price at grant is ordinary income and any remaining gain is long term capital gain. In a disqualifying sale, which is a sale before either holding period is met, the ordinary income is the discount at purchase based on the price on the purchase date, limited to the actual gain. Any remaining gain is capital gain and the holding period for that portion runs from the purchase date. If you sell at a loss in a disqualifying sale, ordinary income may be zero and the entire loss is a capital loss measured from the purchase price.

There is no payroll withholding on ESPP sales, so it is common to owe tax when you file unless you plan ahead with estimates or higher paycheck withholding.

For detailed rules, see IRS Publication 525 for stock options and employee stock purchase plans and Publication 550 for investment income and wash sale rules.

ESPP planning and common pitfalls

Use the discount wisely. The guaranteed discount at purchase is usually worth participating, but it is still concentrated risk. Many employees sell soon after purchase to lock in the discount and redeploy the proceeds. Others hold for a qualifying disposition when the company outlook and personal risk tolerance support it. A CPA can model both paths including federal and state tax to find the breakeven for your situation.

Watch for wash sales. Frequent ESPP purchases can overlap with loss sales. If you sell company stock at a loss and buy substantially identical shares within 30 days, the loss is disallowed and added to the basis of the new shares. With ESPPs, that new purchase can be the one made through payroll. Dividend reinvestment is another frequent trigger. If you plan to harvest a loss, consider turning off dividend reinvestment and pausing ESPP purchases for the wash sale window to preserve the loss.

Keep records. For ESPP sales, the 1099 B from your broker may not report the compensation income component. Your CPA will adjust the basis and ordinary income correctly so you do not overpay. Publication 525 discusses how to report ESPP sales, and Form 8949 and Schedule D cover basis adjustments and capital gains reporting.

Wash sale traps with company stock

Wash sale rules disallow a loss when you sell a security at a loss and acquire substantially identical stock within 30 days before or after the sale. The disallowed loss is added to the basis of the replacement shares and your holding period carries over. This rule applies across all your accounts and across brokers.

With company stock, replacement shares can come from sources you do not think of as a purchase. These include RSU vests when shares are delivered to you, ESPP purchases through payroll, automatic dividend reinvestments, and open market buys through a brokerage. Option exercises that deliver shares are acquisitions too. If you sell at a loss in a taxable account and your IRA buys the same stock within the window, the loss is permanently lost because basis does not carry inside the IRA. Publication 550 covers wash sales and their reporting.

Practical tactics help you avoid wash sale headaches. Disable dividend reinvestment for company stock in taxable and retirement accounts. If you plan a loss sale, avoid buying the stock for at least 31 days on all accounts. Consider using a broad market fund during that window if you want to keep market exposure without buying the specific company stock. For ESPP participants, coordinate sale timing with purchase dates and offering periods to keep the 30 day windows clean.

Quarterly estimates and safe harbors

Even with better withholding, many equity holders should use quarterly estimated tax payments to stay on track. IRS safe harbors give you clear targets. You can avoid penalties by paying in at least 90 percent of your current year total tax or a safe harbor based on last year which is generally 100 percent of last year or 110 percent if your income was higher. Publication 505 and Form 2210 explain these rules.

Where equity makes a large part of your income, plan your estimates around vesting and sales. A midyear check in June or July to compare year to date results with your plan helps you adjust. If you discover a shortfall late in the year, remember that increasing paycheck withholding can help because withholding is treated as paid evenly through the year. A CPA can tell you how much to add to payroll withholding versus how much to send as an estimated payment so you hit safe harbors with the least cash outlay.

Cost basis corrections on equity sales

Many 1099 B statements understate cost basis for RSU and ESPP shares because the broker does not include the compensation income already taxed through payroll. If you report that basis as is, you will pay tax twice on the same shares. The fix is straightforward. Pull the vesting or purchase confirmations to confirm the fair market value that flowed through wages. Use Form 8949 to adjust the basis to the correct amount, then carry the result to Schedule D. Keep a short note with your records that ties the adjustment to equity compensation reported on Form W 2. See the IRS page for Form 8949 and the Schedule D instructions for more detail.

Mobility and state tax considerations

Stock awards often vest over time while you may change states or work remotely. Many states tax RSU income based on where the related work was performed during the vesting period. That can create allocation across multiple states and require several state returns. Employers sometimes withhold to more than one state on a single vest. Credits for taxes paid to another state may be available, but they can be complex without careful allocation records.

For ISOs and ESPPs, states vary on whether they follow the federal character and timing rules. Some have their own AMT. A CPA who handles multi state equity can map your work history to the stock vesting and exercise timeline and set accurate withholdings and estimates so you are not over or under withheld in either state.

Year round equity tax playbook

Early in the year, map projected vests, potential ISO exercises, and ESPP purchases. Set a personal AMT budget and choose ISO exercise targets that you can afford even if the stock falls. Decide how you will handle each RSU vest, whether to sell to cover only or to sell additional shares to raise cash for taxes. Confirm that dividend reinvestment is off for company stock if you are likely to sell at a loss this year.

Midyear, compare actual vests and sales to your plan. Update your income and withholding numbers and make a quarterly estimated payment if needed. If the stock has dropped below your ISO exercise value and you exercised early, consider a same year sale to remove AMT. Reconfirm ESPP participation level for the next offering and decide if you will sell immediately after purchase or hold for a qualifying disposition.

Late in the year, run a full projection. Increase payroll withholding on a regular or supplemental paycheck if you are short on safe harbor targets, as this can help with penalty relief. Clean up any positions where you want to realize gains or losses, taking care with wash sale windows. If you will claim the child tax credit, education credits, or other benefits with income phaseouts, consider the impact of an ISO disqualifying sale or additional RSU sales on those thresholds. Harvesting capital losses in non company positions can help offset gains from sales of appreciated shares.

How a CPA helps reduce equity tax surprises

A good plan brings everything together so you have fewer surprises and more control. At Alviso, CPA, we support tech employees with a practical checklist and tailored modeling for RSUs, ISOs, and ESPPs.

We build a year by year cash flow and tax projection that includes scheduled RSU vests, proposed ISO exercises, likely ESPP purchases, and potential sales. We identify the gap between default RSU withholding and your actual marginal rate and propose a mix of additional payroll withholding and quarterly estimates to close it. For ISOs, we prepare AMT projections tied to exercise levels and set early year check points so you have time to pivot if the stock price moves. We track AMT basis and the Minimum Tax Credit so future sales recover credit efficiently.

We also review broker statements for basis errors, reconcile them with payroll records, and prepare Form 8949 adjustments so you do not pay twice. For frequent traders and ESPP participants, we flag wash sale risks that are easy to miss such as IRA purchases or dividend reinvestment. For employees with multi state work histories, we allocate RSU income to the right states and set state level estimates and withholding to avoid penalties and refunds that get stuck for months.

If you want this level of clarity for your equity, we are ready to help with a tailored plan and ongoing management.

Key IRS resources

Authoritative references you or your CPA can use while planning:

• IRS Publication 15 T for supplemental wage withholding

• IRS Publication 505 for withholding and estimated tax

• IRS Publication 525 for stock options and ESPPs

• IRS Publication 550 for investment income and wash sale rules

• Form 8949 and Schedule D for reporting sales and basis adjustments

• Form 6251 for Alternative Minimum Tax

Form 8801 for the Minimum Tax Credit

Quick comparison: RSUs vs ISOs vs ESPPs

Award type	Tax timing	Payroll tax	Withholding	Sale tax	Primary risks
RSUs	Taxed as wages at vest	Yes	Flat supplemental rate often low for high earners	Gain or loss from vest to sale is capital	Underwithholding, wrong 1099 B basis, wash sale with reinvestment
ISOs	No regular tax at exercise if you hold	No at exercise	No withholding at exercise	Qualifying sale gives long term capital gain, AMT may apply at exercise	AMT without cash, price drop after exercise, tracking AMT credit and basis
ESPPs	No tax at purchase for qualified plan	No	No withholding on sale	Ordinary income portion plus capital gain based on holding period	Wash sales with frequent purchases, basis reporting gaps, concentration

FAQ

Can I make an 83 b election for RSUs?

RSUs typically are not eligible for an 83 b election because no property is transferred before vest. An 83 b election can be available for early exercised options where you receive actual stock at exercise. See the IRS page for Form 83 b for details on that election.

Are RSUs subject to Social Security and Medicare?

Yes. RSUs are treated as wages at vest and are subject to payroll taxes. If you have already reached the Social Security wage base for the year, only Medicare applies to later vests.

What happens if I keep ISO shares past one year and the price drops?

If you exercised and held across year end, you may have paid AMT based on the price at exercise. A later sale for less can reduce future AMT and may help you use the Minimum Tax Credit over time, but it does not produce a refund of prior AMT in the year of the sale unless your regular tax in that year exceeds AMT. Modeling with Form 6251 and Form 8801 is the best way to set expectations.

Do I need estimated payments if my company withholds on RSUs?

Often yes. Payroll uses a flat rate for supplemental wages that can be far below your marginal rate when stock vests are large. You can add quarterly estimates or ask payroll to increase voluntary withholding on a later paycheck. Publication 505 and Form 2210 discuss how to avoid underpayment penalties.

Will my company help with AMT on ISOs?

Payroll generally does not withhold for AMT and companies do not cover AMT. AMT is your responsibility as the taxpayer. Plan ISO exercises with a CPA so you can meet holding periods without creating an unaffordable tax bill.

Can I donate company stock to charity for a tax benefit?

When you have appreciated shares held more than one year, donating shares directly to a public charity or donor advised fund can produce a deduction for fair market value while avoiding capital gains. RSUs can be donated only after vest, not before. Work with your advisor to confirm holding periods and documentation for the gift.

Work with Alviso, CPA

Equity pay is a meaningful part of your compensation. Our team helps you plan RSU tax withholding strategies, map ISO AMT planning across years, and structure ESPP participation with clear targets. We set up a calendar for estimates and withholding, watch for wash sale traps, and correct cost basis so you do not pay twice. If you want fewer surprises and a clear path from grant to cash in your account, Alviso, CPA can help.

This content is for general information. Tax results depend on your facts. Talk with a CPA before acting on equity decisions.