California Tax on RSUs and Stock Options: The 2026 Guide

By Paulo Horta · Published July 2026 · 10 min read

Our US federal tax brackets guide covers salary taxation in full, but salary is rarely the whole story in San Francisco. Most tech compensation packages here are built around RSUs, and a fair number still involve stock options — and both interact with California's tax system in ways that catch experienced professionals off guard, not just first-time hires. This is the part of the offer letter that deserves more attention than it usually gets.

California's Own Tax Layer

On top of federal tax, California runs its own progressive scale — ten brackets from 1% to 13.3%, indexed roughly 3.2% higher for 2026. Two additional pieces stack on top of that:

• State Disability Insurance (SDI): 1.3% for 2026 (up from 1.2%), and — unlike Social Security — there's no wage cap. Every dollar of wages is subject to it, including equity income taxed as wages, all the way up.
• The Behavioral Health Services Tax (formerly the "millionaire's tax"): an additional 1% on income above $1,000,000, layered on top of the regular 13.3% top bracket. For a big liquidity event or a year with major RSU vests pushing you past seven figures, the marginal state rate on that slice effectively reaches 14.3%.

RSUs: Simple in Concept, Not in Timing

Restricted Stock Units are taxed as ordinary income the moment they vest, at the fair market value on that date — there's no election, no deferral, no choice involved. Your employer withholds shares (or cash) to cover the tax at vest, same as a bonus. The detail that surprises people who relocate mid-vesting: California sources the income based on the ratio of workdays spent in California between the grant date and the vest date, not just where you happen to live when the shares actually vest. Move out of California partway through a multi-year vesting schedule and a portion of those RSUs can still owe California tax even after you've left.

Stock Options and the AMT Trap

Incentive Stock Options (ISOs) get favourable federal treatment — no ordinary income tax at exercise, only when you eventually sell — but that favourable treatment runs straight into the Alternative Minimum Tax. Exercising ISOs while holding the shares (rather than selling immediately) can create a large "phantom" AMT liability based on the spread between your strike price and the current fair market value, even though you haven't actually sold anything or received cash.

For 2026, federal AMT applies at 26% up to $244,500 of AMT income and 28% above that, with an exemption of $137,000 for single filers ($220,800 for married filing jointly). California adds its own 7% AMT on top — and critically, California does not recognise the special federal treatment of ISOs at all. The state taxes the exercise spread (and any subsequent gain) as ordinary income up to 13.3%, regardless of how carefully you've structured the federal side.

The AMT paid on an ISO exercise usually isn't a permanent loss — it generates a credit (Form 8801) that can be used in future years once your regular tax exceeds your AMT — but it's a real, immediate cash cost in the exercise year, and it's precisely the kind of thing that blindsides someone exercising a large ISO grant in the same year as a big RSU vest pushes their income unusually high.

Worked Example: $150,000 Salary Plus $120,000 in Vested RSUs

Take a San Francisco engineer on a $150,000 base salary who also vests $120,000 of RSUs during the year. Both are taxed identically as ordinary wages — combined $270,000 subject to federal brackets, California's own scale, SDI at 1.3% with no cap, and FICA. The result is an effective combined federal-plus-state rate typically in the 37-41% range at this income level, before any ISO exercise decisions even enter the picture. See your own base-salary breakdown on our San Francisco salary calculator, and treat vested RSUs as additional ordinary income on top of whatever that page shows.

Practical Takeaways

• Withholding on RSU vests is often a flat default rate that may not match your actual marginal rate — a shortfall shows up at filing time if you don't adjust.
• Coordinate ISO exercises with RSU-heavy years. Exercising a large ISO grant in the same year as major RSU vests compounds AMT exposure; spreading exercises across years is a common, legitimate way to manage it.
• Relocating mid-vest doesn't fully escape California tax on RSUs granted while you were a resident — the workday-sourcing rule follows the grant.
• Above $1 million in a year, plan for the extra 1% Behavioral Health Services Tax on top of the regular top bracket.

This article is general information, not tax advice. Equity compensation strategy — especially ISO exercise timing and AMT planning — is highly individual; consult a CPA or tax attorney familiar with California equity compensation before making exercise decisions.