Equity compensation: RSUs, stock options, supplemental wage withholding and the section 83(i) deferral election in United States

This Guide covers the federal payroll treatment of equity compensation paid to employees: income arising on restricted stock, restricted stock units and stock options under section 83, the flat-rate withholding rules that apply when that income is paid as supplemental wages, and the election under section 83(i) that lets a qualified employee of an eligible corporation defer the income from a qualified equity grant. It is written for the employer or payroll agent that must withhold, deposit and report, and for the adviser checking whether an election was validly made in time. Figures are for tax year 2026. The withholding figures are taken from the 2026 edition of Publication 15 (Circular E); the statutory rules are taken from 26 U.S.C. § 83, whose text on uscode.house.gov is stated to be the law in effect on September 2, 2026, so those rules are not year-specific.

Who this is for

Employers, and their payroll and tax agents, that transfer stock to employees in connection with the performance of services, or that settle restricted stock units or stock options in stock. It is for the person operating chapter 24 withholding on that compensation and reporting it on Form W-2 and Form 941. The section 83(i) part applies only where the corporation is an eligible corporation making qualified equity grants and the individual is a qualified employee: 26 U.S.C. § 83(i)(3)(B) puts outside it any individual who is a 1-percent owner at any time during the calendar year or was one at any time during the 10 preceding calendar years, any individual who bears a relationship described in section 318(a)(1) to a person described in section 83(i)(3)(B)(ii), and any individual who is one of "the 4 highest compensated officers of such corporation for the taxable year" or was one for any of the 10 preceding taxable years, determined on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934. It is not for non-employee service providers, and it is not a guide to state withholding.

Rates, thresholds and deadlines

Supplemental wage withholding and employment tax figures

What	Value	Note
Source	all figures below	https://www.irs.gov/publications/p15
Withholding rate on supplemental wages	22%	The page states that "The withholding rate on supplemental wages remains 22%".
Rate once the calendar-year supplemental wage threshold is passed	37%	Stated in the same sentence as "(37% if supplemental wages paid to an employee during the calendar year exceed $1 million)".
Threshold for the mandatory higher rate	$1 million of supplemental wages during the calendar year	Section 7 of the page is headed for the case where "an employee receives more than $1 million of supplemental wages from you during the calendar year".
Social security wage base limit	$184,500	The page states "The social security wage base limit is $184,500."
Medicare tax rate	1.45% each for the employee and employer	The page states there is "no wage base limit for Medicare tax".

Flat-rate withholding and nonresident alien employees

What	Value	Note
Source	all figures below	https://www.irs.gov/publications/p15t
Mandatory flat rate referred to for supplemental wage payments	37%	The nonresident alien withholding procedure does not apply to a supplemental wage payment "if the 37% mandatory flat rate withholding applies".
Optional flat rate referred to for supplemental wage payments	22%	The same exclusion applies where "the 22% optional flat rate withholding is being used to figure income tax withholding on the supplemental wage payment".

Election deadlines and the deferral period under section 83

What	Value	Note
Source	all figures below	https://www.law.cornell.edu/uscode/text/26/83
Section 83(b) election deadline	not later than 30 days after the date of the transfer	The section says the election "shall be made not later than 30 days after the date of such transfer"; it may not be revoked except with the consent of the Secretary.
Section 83(i) election deadline	no later than 30 days after the first date the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier	The election is "made in a manner similar to the manner in which an election is made under subsection (b)".
Maximum deferral period under section 83(i)	5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier	One of the events in section 83(i)(1)(B); inclusion falls in the taxable year that includes the earliest of the listed events.
Other events that end the deferral	the first date the qualified stock becomes transferable (including to the employer); the date the employee first becomes an excluded employee; the first date any stock of the issuing corporation becomes readily tradable on an established securities market; the date the employee revokes the election	The listed events in section 83(i)(1)(B), taken with the 5-year date.
Excluded employee: ownership test	1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year, or at any time during the 10 preceding calendar years	Section 83(i)(3)(B)(i).
Excluded employee: officer test	one of the 4 highest compensated officers for the taxable year, or for any of the 10 preceding taxable years	Section 83(i)(3)(B)(iv).
Stock redemption safe harbour percentage	not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock	Condition in the limitation on stock redemptions, applied with the requirement that "the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis".

Section 83(i) administration: IRS guidance

What	Value	Note
Source	all figures below	https://www.irs.gov/pub/irs-drop/n-18-97.pdf
Provision containing the 80% requirement	section 83(i)(2)(C)(i)(II)	The notice addresses "the 80% requirement of section 83(i)(2)(C)(i)(II)" in the definition of an eligible corporation.
Deadline for the employer to recover income tax withholding it paid from its own funds on deferral stock	until April 1 of the year following the calendar year in which the wages were paid	Stated in the employment tax part of the notice, which also requires the employer to "report that amount and the withholding on Form W-2 and Form 941".
Transition standard for the 80% requirement and the section 83(i)(6) notice requirement	a corporation is treated as in compliance if it complies with a reasonable good faith interpretation of those requirements, until regulations or other guidance are issued	Section 13603(g) of the Act, as described in the notice.

The method, step by step

1. Identify, for each award, the event that produces compensation under section 83 — the transfer of the stock, the lapse of the substantial risk of forfeiture, or the settlement of the unit — using the statutory tests at https://www.law.cornell.edu/uscode/text/26/83, which treat rights as subject to a substantial risk of forfeiture where full enjoyment is conditioned on the future performance of substantial services, and as transferable only where a transferee's rights are not subject to such a risk.
2. Where restricted stock is transferred and the recipient wants to be taxed at transfer, make the section 83(b) election within the period in the election table above, in the manner the Secretary prescribes: https://www.law.cornell.edu/uscode/text/26/83. The statute states the election may not be revoked except with the consent of the Secretary.
3. Treat the resulting compensation as wages and apply the supplemental wage rules in section 7 of Publication 15 (2026) at https://www.irs.gov/publications/p15, which set out three cases in this order: supplemental wages combined with regular wages, withholding where the employee does not receive $1 million of supplemental wages from you during the calendar year, and withholding once the employee receives more than $1 million of supplemental wages from you during the calendar year.
4. Apply social security and Medicare tax to the same wages using the wage base limit and Medicare rate in the first table: https://www.irs.gov/publications/p15.
5. For a nonresident alien employee, check Publication 15-T (2026) at https://www.irs.gov/publications/p15t before applying the nonresident alien withholding procedure, because that procedure does not apply to a supplemental wage payment where the mandatory flat rate applies or the optional flat rate is being used.
6. To use section 83(i), first test the corporation: it must be an eligible corporation, which turns on the 80% requirement of section 83(i)(2)(C)(i)(II) and on the limitation on stock redemptions, including the 25 percent condition in the election table: https://www.law.cornell.edu/uscode/text/26/83 and https://www.irs.gov/pub/irs-drop/n-18-97.pdf. Note the statutory bar where any stock of the issuing corporation is readily tradable on an established securities market at any time before the election is made.
7. Then test the individual against the qualified employee and excluded employee definitions in the election table: https://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title26-section83&num=0&edition=prelim. The statute also requires the employee to agree in the election "to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met".
8. Give the employer notice required by section 83(i)(6): the corporation must notify the employee that the stock is qualified stock and that the employee may be eligible under section 83(i) to defer income on that stock, as described at https://www.irs.gov/pub/irs-drop/n-18-97.pdf.
9. Take the employee's election within the 30-day period in the election table and diarise every event in section 83(i)(1)(B) that ends the deferral, including the 5-year date: https://www.law.cornell.edu/uscode/text/26/83.
10. When the deferral ends, include the amount in the employee's wages, withhold, and report the amount and the withholding on Form W-2 and Form 941; if the employer pays the income tax withholding on the deferral stock from its own funds it may recover that amount from the employee up to the date in the guidance table: https://www.irs.gov/pub/irs-drop/n-18-97.pdf.
11. File the information returns for statutory options where they apply: Form 3921 for each transfer of a share on the exercise of an incentive stock option described in section 422(b), and Form 3922 for the first transfer of legal title of a share acquired under an employee stock purchase plan described in section 423(c) where the exercise price is less than 100% of the value of the stock at grant or is not fixed or determinable at grant, and furnish the statement to the person named on the form: https://www.irs.gov/instructions/i3921. This Guide states no filing or furnishing date for these forms; take the dates from that instructions page.
12. Where the official pages are silent, say so rather than fill the gap: neither Publication 15 (2026) nor Notice 2018-97 as read here states a valuation method for private company stock, and this Guide states none.

Ask the client first

• Is any stock of the corporation readily tradable on an established securities market, at any time before the election would be made?
• Has the employee ever been a 1-percent owner, or one of the 4 highest compensated officers, in the current or any of the 10 preceding years?
• How much has this employee already received in supplemental wages from you this calendar year, against the $1 million threshold in the first table?
• Is the award restricted stock, a restricted stock unit, a nonstatutory option, an incentive stock option under section 422(b) or an ESPP right under section 423(c)?
• Did the corporation purchase any of its outstanding stock in the calendar year preceding the year that includes the first date the employee's rights become transferable or cease to be subject to a substantial risk of forfeiture?
• When exactly did the rights become transferable or cease to be subject to a substantial risk of forfeiture, so the 30-day election window can be measured?

When to refuse or refer

• State and local income tax withholding on equity compensation, including California and New York sourcing for employees who moved or worked in more than one state.
• Alternative minimum tax on the exercise of an incentive stock option, and the section 422(d) and section 423(b)(8) dollar limitations, which are not stated in this Guide.
• Additional Medicare Tax and its withholding threshold, which is not stated in this Guide.
• Section 409A treatment of deferred stock unit arrangements, and discounted options.
• The due dates, penalties and electronic filing rules for Forms 3921 and 3922 and Form W-2, and the Form W-2 box codes for equity compensation, none of which are stated in this Guide.
• Equity granted to non-employees, to partners, or by a partnership or LLC, and equity granted by a non-US parent.
• Securities law questions, including Securities Exchange Act section 16(b) exposure, beyond the effect that section 83(c)(3) gives it.
• Valuation of private company stock, and any case where the fair market value at the taxable event is in dispute.

Sources

• https://www.irs.gov/publications/p15 (supplemental wage withholding, social security wage base, Medicare rate)
• https://www.irs.gov/publications/p15t (flat rate withholding and nonresident alien employees)
• https://www.law.cornell.edu/uscode/text/26/83 (section 83(b) and section 83(i) election deadlines, deferral period, excluded employee, redemption limitation)
• https://uscode.house.gov/view.xhtml?req=granuleid%3AUSC-prelim-title26-section83&num=0&edition=prelim (statutory text of 26 U.S.C. § 83 in effect on September 2, 2026)
• https://www.irs.gov/pub/irs-drop/n-18-97.pdf (Notice 2018-97: 80% requirement, employment tax and reporting, employer recovery date, good faith transition rule)
• https://www.irs.gov/instructions/i3921 (Forms 3921 and 3922 filing and statement requirements)