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Leaving Your Job With Equity: Severance Tax, Unvested RSUs, Options and Tender Offers

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

Severance is taxed as ordinary wages. It is subject to federal income tax, Social Security (until you pass that year’s wage base) and Medicare, and in California to state income tax and SDI, exactly like salary (IRS Publication 525). The catch for a high-income household is withholding: employers usually withhold a flat 22% federal on a lump sum, while a family earning $750k or more typically owes 35% to 37% on that money, so the gap shows up as a bill in April.

Severance is only one piece of leaving a job with equity. Unvested RSUs, a 90-day option exercise window, a tender offer at a private company and an IPO lockup each come with their own deadline. This page walks through each one for a W-2 family in California or Washington, with real 2026 numbers, so you know which decisions are urgent and which can wait.

How severance is taxed at a $1M household income in 2026

The IRS treats severance as supplemental wages. For 2026, an employer may withhold federal income tax at a flat 22% on supplemental wages, and must withhold 37% on supplemental wages above $1,000,000 paid to you in the calendar year (IRS Publication 15). Withholding is a prepayment, not the tax. Your actual rate depends on the household’s total income for the year.

Payroll taxes work the same way they do on salary:

Worked example: a $300,000 severance, California vs Washington

Assumptions (labelled, simplified): married couple filing jointly, two children ages 4 and 7. Spouse A is laid off in September 2026 after earning $350,000 in salary and RSU income that year. Spouse B earns $400,000. Spouse A receives a $300,000 lump-sum severance in October. We use the 2026 federal standard deduction of $32,200 and, for simplicity, the same taxable income for California, using California’s 2025 rate schedule (the 2026 schedule was not yet published when this was reviewed).

On the $300,000 severance California family Washington family
Federal income tax actually owed (taxable income rises from $717,800 to $1,017,800: $50,900 at 35%, $249,100 at 37%) $109,982 $109,982
Medicare (1.45% + 0.9%); Social Security already maxed $7,050 $7,050
State income tax (CA 2025 brackets: 9.3%, 10.3%, 11.3%, plus 1% on taxable income over $1M) $32,089 $0 (2026)
CA SDI at 1.3% $3,900 n/a
Total tax on the severance $153,021 $117,032
Withheld at payout (22% federal, Medicare, plus CA 6.6% and SDI) $96,750 $73,050
Still owed when you file $56,271 $43,982
Severance kept after tax $146,979 $182,968

The Washington column leaves out the WA Cares premium: 0.58% of all wages with no cap, which applies to severance too, so about $1,740 on this payment unless the employee has an approved exemption from ESD (WA Cares Fund, RCW 50B.04.010, WAC 192-510-025). Paid Leave premiums stop at the $184,500 Social Security wage base, which Spouse A has already passed.

The point is not the exact figure. It is that a family can receive a check that looks fully taxed and still owe $40,000 to $60,000 more. To avoid an underpayment penalty, federal withholding plus estimated payments generally need to reach 90% of this year’s tax or 110% of last year’s tax when last year’s AGI was over $150,000 (IRS Publication 505). The working spouse can raise withholding on the next few paychecks to close the gap, because federal withholding is treated as paid evenly through the year unless you show otherwise (Form 2210 instructions). California is stricter: if California AGI is $1,000,000 or more, estimated payments must be based on 90% of the current year’s tax, and the prior-year option is not available (FTB). The California family in this example, at about $1,050,000 of income, is in that group.

What you can and cannot control about severance timing

The payment date is set by the separation agreement. If you are negotiating in November or December, it is reasonable to ask before you sign whether payment can be made in January, which may move the income into a lower-income year if you expect a gap between jobs. Once you have signed and the money is payable, you generally cannot choose to push it back. Deferred compensation and some severance plans have strict timing rules under Section 409A, so have the agreement read before you sign rather than after.

What happens to unvested RSUs when you leave

Under most plans, unvested RSUs are forfeited on your last day. Forfeited units are never taxed, because RSUs are taxed as wages only when shares are delivered at vest (Treas. Reg. §1.83-3(e)). You do not get a deduction for them either.

Three things are worth checking before your last day:

  1. Acceleration in the severance agreement. Some layoffs include accelerated vesting for units that would have vested within a set period. Accelerated RSUs are wages in the year they vest, on top of the severance, and federal withholding jumps to 37% on supplemental wages above $1,000,000 for the year.
  2. Your last vest date. If a quarterly vest falls a week after a proposed termination date, ask whether the date can move. It is a common and reasonable request.
  3. Shares you already hold. Vested RSU shares are yours. Their cost basis is the value at vest, which is sometimes missing or understated on Form 1099-B. Our guide to reporting RSUs on your tax return shows how to fix basis so you are not taxed twice.

For the mechanics of vest-date taxation, see how RSUs are taxed and how to calculate RSU tax step by step.

The 90-day stock option exercise window after you leave

Vested stock options usually expire a set time after your employment ends. Many plans use 90 days; some private companies have extended windows. The plan document and your grant agreement control the date, not tax law, so read them on day one.

For incentive stock options (ISOs), the tax rule adds a second clock. An option keeps ISO treatment only if it is exercised no later than 3 months after you stop being an employee (1 year if you leave because of disability) (IRS Publication 525; IRC §422(a)(2) and (c)(6)). If your company gives a longer window and you exercise after 3 months, the option is taxed as a nonqualified option: the spread at exercise is ordinary income.

Option type Tax when you exercise after leaving Main risk
NSO (nonqualified) Spread is ordinary income in the year of exercise; in California, state tax at ordinary rates Paying tax in cash on shares you may not be able to sell (private company)
ISO, exercised within 3 months No regular tax at exercise, but the spread counts for AMT if you still hold the shares at year end An AMT bill on paper gains; see tentative minimum tax for ISO holders
ISO, exercised after 3 months Treated as an NSO Losing ISO treatment by accident

At a public company the decision is usually simple: exercise and sell, or let options with no spread lapse. At a private company it is harder, because you pay cash (strike price plus any tax) for shares you cannot sell until a tender offer or IPO. A useful rule for this family: do not put money into private-company shares that you would need for school tuition, a home down payment, or six months of expenses during a job search. Our comparison of stock options vs RSUs covers the underlying differences.

Tender offers: should you sell private-company shares?

A tender offer is an offer, usually by the company or an investor it arranges, to buy shares from current and former employees at a set price. The tax depends on what you sell:

California vs Washington. California has no lower rate for capital gains, so a long-term gain is taxed at the same 9.3% to 13.3% as wages (2025 rates) (FTB). Washington taxes long-term capital gains at 7% above the standard deduction ($278,000 for 2025, the latest published amount) and 9.9% on taxable gains above $1,000,000 (Washington DOR).

The decision is rarely about tax. If the tender lets you sell part of a private holding that is a large share of your net worth, taking some cash off the table can reduce the risk that a single company decides whether your children’s college fund exists. Many families sell enough to cover a specific goal, write down why, and keep the rest.

IPO lockups and the 10b5-1 basics for employees

When a company goes public, employees typically agree not to sell for a period after the offering. The terms vary, but the SEC notes that most lockups prevent insiders, including employees, from selling for 180 days, and the terms must be disclosed in the prospectus (SEC). Read your company’s prospectus for the exact date and any early-release triggers.

After the lockup, and at any established public company, employees covered by the company’s insider trading policy can generally trade only during the open windows that policy sets. Which employees are covered varies by company, so read your own policy. A Rule 10b5-1 plan is a written plan, adopted when you have no material nonpublic information, that schedules future sales in advance so they can happen even during a blackout. Under the SEC’s 2022 amendments, employees who are not directors or officers must wait a 30-day cooling-off period before the first trade; directors and officers wait the later of 90 days or two business days after the next quarterly results, capped at 120 days (SEC fact sheet).

Two points matter when you leave. First, many insider trading policies keep restricting former employees until the next open window, so check the policy before planning a sale. Second, if you set up a 10b5-1 plan while employed, ask your broker and the company what happens to it after your last day. For reducing a large single-stock position over time, see our guide to separately managed accounts and RSU concentration.

Decision checklist for your last 90 days

  1. Before signing the separation agreement: confirm the payment date, any vesting acceleration, the option exercise deadline, and whether health coverage or a bonus is included.
  2. Within two weeks: estimate the tax on severance at your real marginal rate and raise the working spouse’s withholding or make an estimated payment.
  3. Write the option deadline on the family calendar: the plan date and, for ISOs, the 3-month date.
  4. List every share lot: vested RSU shares, ESPP shares, options, and private-company shares, with cost basis and the date each became long-term.
  5. Decide on cash first: set aside six to twelve months of family spending before exercising options or buying into private shares.
  6. For a tender or IPO: decide how much to sell for a named goal, not on price alone.
  7. Check benefits that end: dependent care FSA (up to $7,500 per household for 2026), health FSA, life and disability coverage. Group life insurance often ends with the job, which matters for parents of young children.
  8. Leave the 401(k) or roll it over: there is no rush, and cashing it out turns retirement savings into taxable income in a year that is already high.

What to document for your kids

A layoff or a liquidity event is one of the few times children see a big money decision happen in real time. They will remember that a parent stopped going to work, or that the family suddenly had more cash. They will not know why you chose what you chose unless you write it down.

A one-page Decision Memo in your FamilyKnowledge® Library can cover:

As Kevin Luu, co-founder of Bright Advisers, puts it: “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.” A seven-year-old will not read the memo this year. At eighteen, it may be the most useful thing you left them about money and work.

Frequently asked questions

Why was so little tax withheld from my severance?

Employers usually withhold federal tax on a lump-sum severance at the flat 22% supplemental rate, and in California at the 6.6% flat rate for severance. A household above roughly $768,700 of taxable income (joint, 2026) pays 37% federal on extra wages, and California families commonly pay 10.3% or more. The difference is due when you file, so plan for it now.

Can I spread severance over two tax years?

Only if the agreement provides for it. Some employers will pay in installments or in January if you ask before signing. After you have signed and the payment is due, moving it is generally not possible, and severance under some plans is subject to Section 409A timing rules. Ask before you sign, and have the agreement reviewed.

Is unemployment insurance affected by severance?

Rules depend on the state agency and how the severance is paid, so check with California EDD or Washington ESD directly before filing a claim. Unemployment benefits are taxable federal income, so include them in your withholding plan if you receive them.

Do I lose my unvested RSUs if I am laid off?

Usually yes, unless the severance agreement or the plan accelerates vesting. There is no tax on forfeited units. Ask whether a termination date can fall after your next vest date, and read the agreement for any acceleration terms before signing.

Your next step

Start with three numbers: the tax still owed on your severance, your option exercise deadline, and how much of your net worth sits in one company’s stock. For more on RSUs, ESPP and options at Apple, Amazon and Bay Area biotech, see our equity compensation hub. If you would like a second set of eyes, the Tax & Wealth Assessment from the Age Five Family Office™ looks at the whole picture in one sitting.

This is general education, not individual tax or legal advice. The right move depends on your family’s full picture, including your agreement terms and your next job.