Equity Compensation – what it is, why companies use it, the main types, tax pitfalls, and planning tips.Why Companies Offer Equity CompensationPrimary goal: Attract, retain, and motivate top talent (especially in tech/AI race – Google, Apple, Nvidia, etc.).
Acts as “golden handcuffs” via vesting schedules (e.g., 25% per year over 4 years or a 3-year cliff).
Works for both public and private companies, but private-company equity is riskier (needs a liquidity event like IPO or buyout to have real value).

Main Types of Equity CompensationRestricted Stock Units (RSUs) – Most common & simplest Company gives you actual shares (not an option to buy).
Vest over 3–4 years → treated as ordinary income on vest date (shows up on W-2).
Tax trap: Employers often withhold only 22% federal tax; high earners (37% bracket) can owe big at tax time + possible underpayment penalty.
Conventional advice: “Sell immediately after vesting” (because you already paid tax at the vest price). Tom says not always best — if you believe in the company and it’s not too concentrated, holding some can make sense.

Non-Qualified Stock Options (NSOs/NQSOs) Right (not obligation) to buy shares at a fixed “strike price” (usually within 10 years).
When you exercise and sell, the bargain element (market price − strike price) is taxed as ordinary income.
Company gets a tax deduction → why employers prefer NSOs over ISOs.

Incentive Stock Options (ISOs) – Less common now Potential for long-term capital gains treatment if holding-period rules are met.
Big catch: The bargain element is an AMT (Alternative Minimum Tax) preference item → can trigger AMT and create a huge surprise tax bill.
2025 may be a sweet spot to exercise ISOs because current AMT exemptions are still high (TCJA rules); exemptions drop in 2026, so more people could get hit.

Performance Share Units (PSUs) Payout (number of shares) depends on company performance over ~3 years (e.g., stock price, EBITDA targets).
Aligns employee and shareholder incentives perfectly (Elon Musk–style packages are an extreme example).

Key Tax & Planning Takeaways RSUs and exercised NSOs = ordinary income (up to 37% federal + state).
Under-withholding on RSUs is extremely common → fix by increasing paycheck withholding or making quarterly estimated payments.
High earners: Consider donating appreciated vested shares (RSUs or exercised options) to charity or a Donor-Advised Fund instead of selling → avoid capital gains tax and get a deduction.
End-of-year must-do’s for equity-comp recipients: Project upcoming vest/exercise events.
Strategically exercise NSOs or ISOs to fill lower tax brackets or stay under AMT.
Harvest gains/losses, diversify concentrated positions (especially when market is at all-time highs).

Bottom line from Tom: Equity compensation is powerful but requires proactive, annual planning — it’s not a “set it and forget it” asset like a 401(k). Work with a financial planner and tax pro who can model the scenarios (especially AMT for ISOs) to avoid nasty surprises.