RSU and Stock Option Taxes at IPO: What Employees Owe

Going public turns paper equity into real income, and usually into a real tax bill. This guide walks through what happens to each kind of equity at an IPO, where the withholding falls short, and what to do in the months around the listing.

What changes on IPO day

Before an IPO, most employee equity is hard to sell and, for double-trigger RSUs, not yet taxed at all. The listing changes three things at once:

• Double-trigger RSUs settle. Every RSU that has met its time-based vesting is delivered, and its full value becomes wage income that day.
• Your shares get a market price. Options and exercised shares now have a public value, which drives AMT, capital gains, and your planning.
• A lockup starts. Most employees can't sell for about 180 days, even though the tax on settled RSUs is already due.

RSUs: taxed as pay the day they settle

RSUs are taxed like a bonus. The share price on the settlement date times the shares delivered is ordinary income on your W-2. It's subject to federal income tax, Social Security (until you pass the yearly wage base), Medicare, and state and city income tax where you live.

That value also becomes your cost basis. If you later sell for more, only the growth after settlement is a capital gain.

Example: 5,400 RSUs settle at $48. That's $259,200 of wage income. Your employer withholds 22% federally, about $57,000. If most of that income lands in the 35% bracket, the real federal tax is closer to $90,700, leaving a gap of about $33,700 that no one set aside for you.

For the details of settlement timing and which price counts, see Double-trigger RSUs at IPO.

Why the 22% withholding usually falls short

Employers withhold a flat 22% federally on the first $1,000,000 of supplemental wages and 37% above that. It's a convenience rate, not your rate. If your salary plus RSUs push you into the 32%, 35%, or 37% bracket, you'll owe the difference.

The gap is widest on mid-sized settlements, where the income is well into the top brackets but under the $1,000,000 line. The RSU withholding gap guide shows how to size it.

Stock options at IPO

NSOs: Nothing is taxed at the IPO itself. When you exercise, the spread (market price minus strike) is wage income, with withholding. Many people exercise and sell the same day once the lockup ends.

ISOs: Exercising doesn't create regular income tax, but the spread counts toward the alternative minimum tax (AMT). Once the stock has a public price, a large exercise can trigger a sizable AMT bill. Holding the shares at least one year after exercise and two years after grant turns the whole gain into long-term capital gain. See ISO AMT guide.

Shares you already own

If you exercised early, filed an 83(b), or bought shares in a secondary, the IPO itself isn't taxable. You're taxed only when you sell. Shares held more than a year get long-term capital gains rates. Qualified small business stock (QSBS) may be partly or fully excluded from federal tax.

State and city taxes

Your state taxes RSU income as wages, and several cities add their own tax on top. New York City residents, for example, pay up to about 3.9% on the same income New York State taxes. If you moved during the vesting period, states like California and New York can tax part of your RSUs based on where you worked between grant and vest.

The lockup trap

The tax on settled RSUs is owed for the year they settle, but you may not be able to sell for six months. If the stock falls during the lockup, you can owe tax on a value you never received. Common responses:

• Sell-to-cover at settlement, if your company offers it, so enough shares are sold to pay withholding.
• Set cash aside for the gap before the IPO.
• Plan your first sale for the day the lockup ends, sized to cover what you still owe.

See IPO lockup planning for more.

Paying on time

The IRS expects tax as income is earned, not in April. If withholding falls short, pay the gap through quarterly estimated payments, or raise your paycheck withholding for the rest of the year. Meeting a safe harbor (usually 110% of last year's tax for higher earners) avoids the underpayment penalty. See Estimated taxes and safe harbor.

A short checklist

1. Find out when your RSUs settle and whether sell-to-cover is offered.
2. Estimate your real tax rate for the 2026 year, including state and city tax.
3. Set aside or pay the gap between 22% and your real rate.
4. Decide whether to exercise options before or after the listing, and check AMT.
5. Mark your lockup end date and plan your first sale.
6. Review your plan with a CPA before year-end.