Navigating Year-End Compensation Decisions

As the year draws to a close, executives and highly compensated professionals may face financial decisions that extend well beyond their base salaries. Annual bonuses, equity awards, including restricted stock awards (RSAs) and restricted stock units (RSUs), and deferred compensation can create opportunities to build wealth, but each carries distinct tax implications, timing considerations, and potential risks.

Understanding how these compensation components work together can help you make more informed decisions before year-end and align your earnings with your broader financial goals.

Annual Bonuses: Look Beyond the Payout

A year-end bonus may provide additional liquidity, but understanding its tax treatment may be essential.

For 2026, employers may withhold federal income tax on separately identified supplemental wages at a flat 22% rate, subject to applicable rules. Supplemental wages exceeding $1 million are generally subject to 37% federal withholding on the excess. Importantly, withholding does not necessarily equal your final tax liability.¹

Before receiving a bonus, consider whether additional withholding or estimated tax payments may be appropriate. You might also evaluate opportunities to direct proceeds toward retirement savings, debt reduction, or other financial priorities.

Equity Compensation: Evaluate Your Exposure

Equity compensation can create meaningful wealth-building opportunities, particularly when your employer’s stock performs well. However, it can also concentrate financial risk in a single company.

Stock options, restricted stock awards (RSAs), restricted stock units (RSUs), and other equity awards have different tax treatments and liquidity considerations. RSAs and RSUs differ in when employees receive company shares, how they are taxed, and the planning considerations they present. Understanding exercise deadlines, vesting schedules, and potential tax consequences may be critical before making decisions.

Year-end is also an opportunity to evaluate whether your employer’s stock represents an appropriate percentage of your overall investment portfolio.

Restricted Stock Awards (RSAs) and Units (RSUs): Plan Around Vesting

Although RSAs and RSUs are both forms of equity compensation, their ownership structures and tax implications differ.

RSAs grant employees company shares upfront, subject to vesting requirements. They are generally taxed as ordinary income when restrictions lapse, although employees may choose to recognize income at grant by making a timely Internal Revenue Code Section 83(b) election. This election carries additional risks and considerations.

RSUs generally represent a promise to deliver company shares or cash once specified conditions are satisfied. Unlike RSAs, no actual shares are issued at grant, and RSUs are not eligible for an 83(b) election.

For stock-settled RSUs, ordinary income is generally recognized when shares are delivered, often at vesting. Subsequent changes in share value may create capital gains or losses when the shares are sold.²

Review upcoming vesting dates, anticipated tax obligations, and potential selling restrictions. A coordinated strategy can help manage liquidity needs while addressing concentrated stock exposure.

Deferred Compensation: Balance Tax Timing and Risk

Nonqualified deferred compensation plans may allow eligible executives to postpone receiving a portion of their earnings until a future date.

Although deferrals may offer income tax planning opportunities, these arrangements involve important trade-offs. Elections and distributions are generally subject to strict timing requirements under Internal Revenue Code Section 409A. Certain deferred amounts may also be subject to employment taxes before distribution.³

Consider your anticipated future tax bracket, retirement timeline, liquidity requirements, and exposure to your employer’s financial health before making an election.

Bring Your Compensation into the Bigger Picture

Compensation decisions shouldn’t happen in isolation. A bonus, equity vesting event, or deferred compensation election can influence your investment allocation, tax exposure, cash flow, and retirement strategy.

At Sequoia Financial Group, our BUILT FOR YOU approach connects these decisions to your broader financial picture, helping you evaluate opportunities, manage risks, and make thoughtful choices that support your long-term goals.

 

 

Sources:

1. Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide. https://www.irs.gov/publications/p15
2. Internal Revenue Service. Publication 525, Taxable and Nontaxable Income. https://www.irs.gov/publications/p525
3. Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide. https://www.irs.gov/publications/p15a