Episode Details

In this episode of Wealthyist, host Dr. Brian Jacobsen speaks with Tom Berkholtz, Financial Planning Manager about Equity Compensation – what it is, why companies use it, the main types, tax pitfalls, and planning tips.
Tom and Brian discuss why companies offer equity compensation, including its primary goal: to attract, retain, and motivate top talent (especially in tech/AI race – Google, Apple, Nvidia, etc.).

Equity compensation can act as “golden handcuffs” via vesting schedules (e.g., 25% per year over 4 years or a 3-year cliff). The strategy can work for both public and private companies, but private-company equity is riskier (needs a liquidity event like IPO or buyout to have real value.

Tom details the main types of Equity Compensation: Restricted Stock Units (RSUs) – where an employer gives you actual shares (not an option to buy).  IN that strategy, the RSU vests 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.  
The conventional advice is to “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.

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

Incentive Stock Options (ISOs) are less common now.  There's a 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) are another option. The 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.