How Is the Employer’s Tax Deduction for Restricted Stock Determined?

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

An employer’s tax deduction for restricted stock equals the amount the employee must include in income for that stock. Under Internal Revenue Code Section 83(h), that is normally the fair market value of the shares on the day they vest, minus anything the employee paid for them, and the company takes the deduction in its tax year in which the employee’s tax year ends (the same year for a calendar-year company). If the employee files an 83(b) election, both the income and the deduction move to the grant date instead.

For a family where one or both parents are paid heavily in company stock (at Genentech, Gilead, Apple, Amazon or a pre-IPO startup), this matching rule is more than a corporate accounting detail. It explains why your W-2 looks the way it does, why your broker’s cost basis is often wrong, and what an 83(b) election really trades away.

The matching rule in Section 83(h)

Section 83 governs property an employee receives for services. Restricted stock (sometimes called a restricted stock award, or RSA) is actual shares issued on the grant date that you can lose if you leave before they vest. Because the shares are subject to a “substantial risk of forfeiture”, you normally owe nothing at grant. At vest, the value becomes ordinary wage income.

Section 83(h) then gives the company a deduction “equal to the amount included” in the employee’s gross income. The Treasury regulations (Treas. Reg. §1.83-6) add a practical point: if the employer reports the income on a timely Form W-2, the employee is treated as having included it, so the company does not have to check your personal return. In practice, the number in Box 1 of your W-2 for vested stock is the number the company deducts.

Three things follow from this rule:

• Grant-date price does not set the deduction. If the stock doubles between grant and vest, the company’s deduction doubles, and so does your taxable income.
• Your later gain is not deductible to the company. Appreciation after vest is your capital gain or loss when you sell. It never shows up on the employer’s return.
• The accounting expense is a different number. For its financial statements, a company expenses stock pay based on grant-date fair value spread over the vesting period. The tax deduction uses the vest-date value. The gap between the two is the “book-tax difference” that shows up in public company filings. It affects the company’s reported tax rate, not your tax bill.

How the rule applies to RSUs, 83(b) elections and ISOs

RSUs

Most public company employees receive restricted stock units, not restricted stock. An RSU is only a promise to deliver shares later, so it is not “property” under Section 83 until the shares are delivered (Treas. Reg. §1.83-3(e)). The result looks the same from the outside: the value of the shares on delivery is wage income to you, reported on your W-2, and the company’s deduction matches that amount. One important difference: an 83(b) election is not available for RSUs, because there is no property to elect on until delivery.

Restricted stock with an 83(b) election

If you receive actual restricted shares (common at early-stage companies, or with early-exercised options), you can file an 83(b) election within 30 days of the transfer (IRS Publication 525). You then report the grant-date value, minus anything you paid, as income right away. The company’s deduction moves to that same year and is limited to that same, often small, amount. All growth after grant becomes capital gain for you and produces no deduction for the company.

The risk sits with you. If you leave and forfeit the shares, you get no deduction for the income you already reported (your loss is limited to what you actually paid), and the regulations require the company to take back its earlier deduction (Treas. Reg. §1.83-6(c)).

Incentive stock options

ISOs follow a different rule. If you meet the holding periods (a qualifying disposition), you have no wage income and the company gets no deduction at all (IRC §421(a)). If you sell early (a disqualifying disposition), part of your gain becomes ordinary income, and the company may deduct that same amount (IRC §421(b)). So an early ISO sale can hand your employer a deduction it would not otherwise get.

A limit that applies to top officers

For public companies, IRC §162(m) generally caps the deduction for pay to each “covered employee” (the CEO, CFO and certain other top earners) at $1 million a year, stock included. That limits the company’s deduction only. Your taxable income stays the full vest value.

Worked example: a $300,000 vest for a California family

Assumptions (illustrative): a married couple in San Mateo County filing jointly for 2026. One parent earns a $350,000 salary at a public biotech company; the other earns $250,000. In March, 2,000 restricted shares vest at $150, so $300,000 is added to the first parent’s W-2. Federal taxable income moves from $567,800 to $867,800 (wages minus the $32,200 standard deduction for 2026). California taxable income is assumed to move from about $580,000 to $880,000.

The company’s deduction and the family’s income are the same $300,000, but the tax outcomes are very different. The company saves $63,000 at a flat 21%. The family pays close to half the value in combined tax, and the default 22% withholding leaves roughly $41,000 of federal tax to cover through estimated payments or extra withholding. If the same parent’s supplemental wages from this employer passed $1 million in the year, withholding on the excess would jump to a mandatory 37% (IRS Publication 15).

The same vest in Washington

For a Seattle or Bellevue family in 2026, the federal and Medicare figures are the same. There is no state income tax on wages in 2026 (WA Department of Revenue), so the roughly $29,270 of California tax and $3,900 of SDI disappear. The WA Cares premium of 0.58% of wages still applies unless the employee holds an exemption. Two caveats for this income level: Washington’s 7% tax on long-term capital gains (9.9% on taxable gains above $1 million) can apply when appreciated shares are later sold, and a new 9.9% income tax on AGI over $1 million takes effect January 1, 2028.

Where families lose money: cost basis after the vest

Because the vest value was already taxed as wages, it becomes your cost basis in the shares (Publication 525). In the example, the 2,000 shares carry a $300,000 basis. Brokers often report employee stock on Form 1099-B with a basis of zero or without the compensation portion. If that number goes onto your return unadjusted, you pay tax on the same $300,000 twice. The Form 8949 instructions explain how to correct the basis. Ask your preparer to reconcile every stock sale against your vest records, not just the 1099-B.

The decisions this actually affects

• Withholding and estimates. Plan for the gap between 22% and your real marginal rate before the vest, not in April. See withhold to cover versus sell to cover.
• Whether to file an 83(b). Worth modeling only for true restricted stock or early-exercised options at a low value, and only within the 30-day window. It is never an option for RSUs.
• ISO sale timing. A disqualifying disposition converts gain to ordinary income. In California, where capital gains are taxed as ordinary income anyway, the state rate does not change, so the added cost is mainly federal; see tax on a cashless exercise.
• Checking the W-2. Your vest income should match the grant statements from your equity plan. The walk-through in do RSUs count as income shows how to check it.

What to write down for your kids

Children never see a vest. They see a car, a house, or a college account and assume the money simply arrived. A one-page note each year (what vested, what it was worth, how much went to tax, what you sold and why you kept the rest) turns stock pay into a lesson about trade-offs. Conversations fade. Documentation compounds. Families who use the FamilyKnowledge® System keep that note alongside the rest of their decision records.

Frequently asked questions

Are RSUs taxed as ordinary income?

Yes. The fair market value of RSU shares on the day they are delivered is wage income, reported on your W-2 and subject to income tax, Medicare and, up to the wage base, Social Security. Your employer deducts the same amount. Only the gain or loss after delivery is capital gain or loss when you sell, and in California even that is taxed at ordinary rates.

Does my 83(b) election change my employer’s deduction?

Yes. With an 83(b) election on restricted stock, you report the grant-date value (minus what you paid) as income right away, and your employer’s deduction moves to that year and that amount. Future growth becomes your capital gain and gives the company nothing. If you later forfeit the shares, the company must reverse its deduction.

Does my employer get a deduction for my ISOs?

Only if you make a disqualifying disposition, meaning you sell before the holding periods end. The company can then deduct the ordinary income you recognize on the sale. After a qualifying disposition, you pay capital gains tax on the whole gain and the employer gets no deduction at all.

Next step

Before your next large vest, pull your equity plan statement and last year’s W-2 and check three things: the income matched the vest value, your withholding covered your real rate, and every sale used the correct basis. If you want a second set of eyes on how stock pay fits your family’s taxes, our equity compensation and tax management work starts with the Tax & Wealth Assessment.

This is general education, not individual tax advice. The right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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