Why Bonuses, RSUs, and Stock Options Can Create Surprise Tax Bills

Avoiding Surprise Tax Bills From Bonuses, RSUs, and Stock Options

Let’s clear up the myth first, because it shapes everything else in this post. Bonuses are not taxed at a higher rate than your regular pay. I know it feels that way when a bonus check arrives lighter than expected, sometimes meaningfully lighter, but the tax rate on that income, once your return is actually filed, is exactly the same rate as the rest of your wages. What’s different is the withholding, not the tax itself. And that difference is exactly what creates the surprise bill people associate with bonuses, RSUs, and equity comp generally.

I get asked about this constantly, usually by someone convinced their employer did something wrong. They didn’t. The withholding rate and the tax rate are two separate numbers that happen to look similar enough to confuse almost everyone. One is what gets set aside today. The other is what you actually owe once the full year’s income is added up. For plenty of people in lower brackets, the flat rate actually over-withholds, and they get a pleasant refund instead of a bill. For higher earners, it runs the other way, and that’s the half of this story nobody warns you about in advance.

The flat rate that quietly assumes you’re in a lower bracket

Employers withhold bonuses and RSU income at a flat federal rate, 22% up to $1 million in year-to-date wages, 37% above that. If your actual marginal tax rate is 24%, 32%, 35%, or 37%, that flat 22% is under-withholding you by ten points or more, every single time it applies. It’s not a mistake. It’s just a blunt mechanism that doesn’t know your full tax picture, and the gap compounds every time it happens across the year.

A concrete example makes this real: $50,000 of RSU income taxed at a 32% marginal rate creates roughly $16,000 of actual tax owed. At the flat 22% withholding rate, only about $11,000 gets set aside. That’s a $5,000 gap, from one vesting event, before you’ve thought about any others that year.

Now multiply that by however many vesting events you actually have. Quarterly vests mean four chances a year for that gap to open up, and it doesn’t reset between them, it compounds. By the time you file, you’re not looking at one $5,000 shortfall. You’re looking at a number that’s been quietly accumulating since the first vest of the year, which is exactly why this catches people by surprise even when they’ve technically known about the 22% rate the whole time. Knowing the rate exists and knowing what it actually does to your specific numbers are two different levels of understanding, and only the second one protects you.

Stock options can create a bill with no cash behind it

If you hold Incentive Stock Options and exercise them without selling, you’ve created what’s called the bargain element, the spread between what you paid and what the shares are actually worth. That spread doesn’t count toward your regular taxable income. It does count toward the Alternative Minimum Tax. Which means you can owe real money to the IRS in a year where you didn’t sell a single share to generate the cash to pay it.

This is the version of the surprise bill that catches people hardest, because there’s no paycheck-sized withholding event to point to. You exercised, you held, and months later there’s a number due that has nothing to do with anything you spent.

I want to be direct about why this particular trap is so dangerous: it rewards the exact behavior that feels like the responsible thing to do. Exercising early and holding, instead of exercising and immediately selling, is often the move that sets up favorable long-term capital gains treatment down the road. So the careful, patient version of you, the one trying to do this right, can end up with the biggest unexpected bill of the bunch. That’s not a reason to avoid ISOs. It’s a reason to run the AMT math before you exercise, not after.

For 2026, the AMT exemption sits at $90,100 for single filers and $140,200 for joint filers, but the phase-out now starts at $500,000 and $1,000,000 respectively, and the phase-out rate doubled from 25% to 50% under recent law changes. Higher earners with meaningful ISO exercises lose that exemption faster than they used to.

What that means in practice: if your income, including the bargain element from an ISO exercise, pushes you past those phase-out thresholds, you lose your AMT exemption roughly twice as fast as you would have under the prior rules. A large exercise that might have stayed under the AMT radar a few years ago can land you squarely inside it now. This is exactly the kind of change that makes “I’ll just do what worked last time” a risky plan for anyone with ISOs this year.

What to actually do about it

You have real options here, and none of them require guessing. You can increase your regular W-4 withholding to absorb the gap from your equity income. You can make an estimated quarterly payment specifically sized to cover what the flat rate misses. Or, if ISOs are part of your picture, you can plan the timing of an exercise with enough lead time to know what the AMT exposure will look like before you commit to it, sometimes spreading exercises across tax years to manage the bracket impact.

I’m not going to tell you which of those fits your situation, because that depends on your income, your equity grant, and how close you are to the AMT thresholds. What I will tell you is this: the surprise only happens to people who didn’t run the math ahead of time. Run it once, with a tax professional who can see your whole picture, and the surprise stops being a surprise.

Why tax Projection Matters before Year-end

The timing of that conversation with a tax professional matters more than people assume. Running the numbers in March, with your equity grant documents and your last pay stub in hand, gives you actual options. Running them in April, after the vest has already happened and the tax year has already closed, leaves you reacting to a number instead of shaping it. If you have equity comp of any kind, a once-a-year projection, done well before year-end, is one of the most valuable hours you can spend on your own financial life.

A bigger paycheck doesn’t automatically come with a clearer plan. Equity comp doesn’t either, unless you build one on purpose. The compensation that’s supposed to reward your best years at work shouldn’t be the thing that blindsides you every April, and it doesn’t have to be, once you know where to actually look.

When was the last time you actually projected your full-year tax liability instead of waiting to see what showed up?

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Wild Iris Financial LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.