2026 tax year · equity compensation
Phantom Stock and Stock Appreciation Rights tax
Phantom stock and stock appreciation rights pay cash tied to share value, but you never own a share. That means no capital-gains rate ever, the whole payout is ordinary income at settlement, plus payroll tax, exactly like a bonus.
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Cash settled at vesting or a liquidity event.
Enter the payout to see the tax on it.
Why the whole payout is ordinary income
Ordinary income when paid or settled, no LTCG treatment. Common in S corps (which cannot have two stock classes) and LLCs. Tax treatment mirrors a cash bonus. Because it settles in cash, an employee pays FICA and a contractor pays self-employment tax, reported on W-2 for an employee, 1099-NEC for a contractor.
On a $25,000 payout for an employee already earning $150,000: the payout adds $6,000 in federal income tax and $1,913 in FICA, leaving $17,088 after its own tax. A real RSU of the same value would be taxed the same way at vesting, the difference is only that a share, once held, can later earn capital-gains treatment. Phantom stock never can.
The other equity instruments
- RSU, under-withholding at vest
- ISO, AMT on an exercise you never sold
- NSO, tax due on exercise with no cash to pay it
- ESPP, selling one day too early
- QSBS, assuming five years when the rules just changed
What this covers
- Federal treatment for the 2026 tax year, from the verified dataset.
- Single filer taking the standard deduction in the worked figures.
- Equity income stacks on top of salary, so it fills your highest brackets, the figures reflect that rather than taxing it in isolation.
- Informational only, not tax advice. Equity decisions are worth a professional's time.