Our nation is saturated with fast-growing tech companies, and with that growth comes competitive compensation packages. Chances are your benefits may include stock options, restricted stock units (RSUs), or employee stock purchase plans (ESPPs). While these can be powerful wealth-building tools, they also create unique tax and planning challenges.
What Are Incentive Stock Options (ISOs)? ISOs give employees the right to buy company stock at a fixed price (the “strike price”) in the future, typically after vesting.
• Usually offered only to employees (not contractors).
• Potential for favorable tax treatment if shares are held long enough (qualifying disposition):
• No ordinary income tax at exercise (but may trigger AMT).
• Gains taxed as long-term capital gains if held at least 2 years from grant and 1 year from exercise.
• Forfeited if the employee leaves before vesting.
What Are Non-Qualified Stock Options (NSOs)? Like ISOs, NSOs let employees (and sometimes contractors or directors) buy company stock at a set price.
• No special tax treatment — the “spread” (market price minus strike price) is taxed as ordinary income at exercise.
• Company gets a tax deduction equal to the employee’s income.
• Gains after exercise (if stock is held) are taxed as capital gains.
• Example: You exercise NSOs at $10 when the stock trades at $30 — the $20 difference is taxable income.
What Are Restricted Stock Units (RSUs)? RSUs are company shares granted to an employee that vest over time or after meeting certain conditions.
• No purchase required — the company gives the shares once vested.
• Taxed as ordinary income when they vest, based on the market value at that time.
• Once vested, the employee owns the shares outright and can sell them (subject to any trading windows).
• Example: An employee receives 1,000 RSUs that vest over four years — 250 shares per year. Each year’s vested shares are taxed as income at their market value.
What Are Employee Stock Purchase Plans (ESPPs)? Programs that let employees buy company stock at a discount — often 10–15% below market — through payroll deductions.
• Typically offered to all employees.
• Two types:
• Qualified (Section 423) — may get favorable tax treatment if holding requirements are met.
• Non-qualified — taxed like regular compensation.
• Common in public companies.
• Encourages employee ownership and participation in company growth.
1. Understand the Tax Impact – Exercising stock options or selling RSUs can trigger large, unexpected tax bills. Strategic timing can help reduce taxes.
2. Diversification Matters – Tech employees often have significant wealth tied to one company. Not only are they employed and depend on this company for work, usually the majority of their investment assets are held in the company stock as well. Building a balanced portfolio helps reduce risk.
3. Cash Flow Planning – Exercising options requires liquidity; planning ahead avoids tapping retirement accounts or going into debt.
4. Coordinate with Retirement Goals – Equity compensation can accelerate wealth accumulation but should fit into your broader financial plan.
If you’re a Research Triangle Park tech professional in North Carolina or a tech professsional near Chattanooga, TN - stock options and equity awards are opportunities to build long-term wealth — but they require careful planning. A fee-only financial planner can help you design a tax-efficient strategy that fits your unique goals.
Please contact Integra Wealth - fee-only, financial planners in Cary, NC if you are a high earning tech professional, working at Research Triangle Park - we would love to chat with you about your equity compensation plan.
Are you a tech employee with an equity compensation plan? If you want to learn more details about RSUs, ISOs, NSOs, & ESPPs, take a look at this article.
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