Your Real Tax Rate on Equity: Effective vs. Marginal vs. Withheld

The short version

When people ask "what's my tax rate on this?", three different numbers get mixed up:

Your effective tax rate is the one that decides how much you keep. The gap between it and your withholding rate is what you owe in April (or by the next quarterly deadline).

How the effective rate is built

Every tax you owe for the year goes in the top of the fraction:

• Federal income tax, bracket by bracket
• Alternative minimum tax (AMT), if it is higher than regular tax
• Social Security (6.2% up to the wage base) and Medicare (1.45%, plus 0.9% above $200,000 single / $250,000 joint)
• The 3.8% net investment income tax on gains, dividends and rent above $200,000 single / $250,000 joint
• State and local income tax, including surtaxes and state AMT

The bottom of the fraction is your total income from every source. Because each source is taxed differently, it helps to look at the rate on each kind of income too. That is what the calculator's "Withheld vs. your real tax rate" card does.

Scenario by scenario

Salary only

The simplest case. Payroll withholding is designed to land close to your real tax, so the effective rate and the withholding rate roughly match. Pre-tax savings (traditional 401(k), HSA) lower both.

RSUs vesting at a public company

Each vest is wage income on the day it vests, taxed at ordinary rates on top of your salary. So RSU dollars are taxed at your highest brackets, not your average.

Withholding is progressive, not a flat 37%: your employer withholds 22% on supplemental pay up to $1 million for the year and 37% only on the dollars above that.

Example. Single filer, $250,000 salary, $400,000 of RSUs vest.

• Federal withheld on RSUs: 22% × $400,000 = $88,000
• Federal tax the RSUs actually cause (mostly 35% and 37% brackets): about $143,000
• Plus 2.35% Medicare and state tax
• Federal gap: about $55,000 before state

Double-trigger RSUs at a private company (IPO or acquisition year)

At a private company, RSUs usually need both time and an IPO or sale before they are taxed. Years of vesting pile up and all hit in one year. That stacking pushes more income into the 37% bracket than if it had been spread out, which raises the effective rate for that year. It can also cross the $1 million line, so part of the payout is withheld at 37% and the rest at 22%.

In the calculator, set Is your company public yet? to Still private and add an expected IPO or sale date. The vesting schedule then moves earlier vests into that year so you can see the spike.

NSO exercise

The spread (market value minus strike price) is wage income, taxed and withheld just like RSUs. Same brackets, same 22% / 37% withholding tiers, same likely gap.

ISO exercise and AMT

Exercising and holding ISOs is not regular income, so nothing is withheld. But the spread counts for AMT. If AMT is higher than your regular tax, you pay the difference, which can raise your effective rate sharply in a year with no cash coming in. Part of it may come back later as an AMT credit. Selling ISO shares too early (a disqualifying disposition) turns the spread into wage income instead.

Selling company stock

Stock sales usually have no withholding at all. The rate depends on how long you held the shares:

• Held one year or less: taxed like salary (up to 37%)
• Held more than a year: 0%, 15% or 20% federal
• Plus 3.8% investment income tax for most people with equity income, plus state tax. Some states, like California, tax all gains as regular income.

If the shares qualify as QSBS, up to the full federal gain may be excluded, lowering the effective rate on that sale close to zero federally (many states still tax it).

Acquisitions, tender offers and escrow

In an acquisition, only the cash you receive this year is taxed now. Stock rolled into the buyer and money held in escrow are generally taxed later, so this year's effective rate covers only part of the deal.

Other brokerage sales

Gains and losses from index funds, other stocks or crypto are netted with your company stock gains. Losses lower your effective rate: they offset gains first, then up to $3,000 of other income, with the rest carried forward. Gains add to your capital gains and can push you over the 3.8% threshold.

Moving states

If you moved during the year, both states may tax part of your income, based on residence dates and, for RSUs, often the days you worked in each state between grant and vest. Your state effective rate is a blend of two tax systems.

Local taxes

Cities like New York City, Portland (Multnomah County) and Philadelphia add their own tax, which raises the effective rate by one to four points.

Why withholding misses

1. Flat 22% vs. high brackets. The most common cause of a balance due.
2. No withholding on sales. Capital gains, the 3.8% tax and state tax on sales are all yours to pay.
3. AMT is never withheld.
4. Two jobs or two earners. Each employer withholds as if it were your only income.
5. State supplemental rates are often lower than your real state rate.

What to do with the number

• Set aside the gap between your effective rate and what was withheld the day the income lands.
• Pay by the next quarterly deadline to avoid the underpayment penalty. See Estimated taxes and safe harbor.
• Plan timing. Spreading ISO exercises, holding shares past one year, or harvesting brokerage losses can all lower the rate.

Find your real rate

The VestMath calculator works out your effective rate across salary, RSUs, NSOs, ISOs, company and brokerage stock sales, AMT, investment income tax, state and local tax, and compares it with what was actually withheld.

General information, not tax advice.