Tax Guide for Tech Workers and Software Engineers

Technology employees at startups, mid-sized companies, and large corporations often receive a significant portion of their compensation in the form of equity — RSUs, stock options, or ESPP participation. These add complexity to what would otherwise be a fairly straightforward W-2 tax situation.

Restricted Stock Units (RSUs)

When your RSUs vest, the value of the shares on the vesting date is ordinary income, reported on your W-2 in the year they vest. Your employer typically withholds shares to cover taxes. The tax is based on the fair market value at vesting, and that value also becomes your cost basis. If you later sell the shares for more than that basis, you have a capital gain; if less, a capital loss. RSUs are one of the most straightforward forms of equity compensation from a tax standpoint.

Nonqualified Stock Options (NSOs)

When you exercise an NSO, the spread between the exercise price and the fair market value is ordinary income, also reported on your W-2 and subject to payroll taxes. When you later sell, you report a capital gain or loss based on the spread between your sale price and the fair market value at exercise (your basis).

Incentive Stock Options (ISOs)

ISOs have more favorable regular tax treatment — exercising them doesn't create regular income. But the spread between exercise price and fair market value is an AMT preference item, which can trigger Alternative Minimum Tax in the year of exercise, sometimes significantly. If you exercise ISOs and hold the shares, run an AMT projection before year-end to understand your exposure.

Employee Stock Purchase Plans (ESPPs)

ESPPs let you buy company stock at a discount, often 15% below market value. The discount and any additional gain at sale are taxable, but the timing and character depend on whether you have a qualifying or disqualifying disposition. Qualifying dispositions (holding the shares long enough) can get better tax treatment.

Freelance Projects and Consulting

Many tech workers take side projects or consulting work in addition to their primary job. This creates 1099-NEC income and self-employment tax obligations. You may need to make quarterly estimated tax payments and can deduct legitimate business expenses for the consulting work.