San Jose Tax Attorneys: What Silicon Valley Tech Workers Need to Know

Most employees receive a W-2 and a straightforward tax return. Technology sector employees in San Jose and throughout Silicon Valley receive something more complicated — RSU vesting schedules, incentive stock options, employee stock purchase plans, and equity grant packages that create tax events most workers do not anticipate until the IRS sends a notice. Understanding how equity compensation is taxed, what California does differently from the federal government, and when to involve a tax attorney can prevent the kind of costly surprises that follow tech workers long after their company’s stock has moved.

Quick Answer: San Jose tech workers face federal and California tax exposure from equity compensation that goes beyond standard return preparation. RSU vesting creates ordinary income at vesting. ISO exercises trigger alternative minimum tax calculations that surprise even financially sophisticated employees. California does not conform to federal ISO tax treatment, adding a state-level layer to every equity event. Kim & Rosado LLP in San Jose handles equity compensation tax situations for Bay Area technology employees and founders. [Source: IRS.gov, irs.gov/newsroom/us-taxation-of-stock-based-compensation, 2025]

Key Takeaways:

• RSU fair market value is includable in income at vesting and reported on the employee’s W-2 as ordinary income [Source: IRS.gov, irs.gov/newsroom, 2025]
• ISO exercises do not create regular taxable income at exercise — but they do create an AMT adjustment equal to the spread between exercise price and fair market value [Source: IRS.gov, Instructions for Form 6251, irs.gov/instructions/i6251, 2025]
• There is a $100,000 annual limitation on ISO value that may first become exercisable in any calendar year — amounts above that threshold are treated as non-statutory options [Source: IRS.gov, Equity Compensation Audit Technique Guide, irs.gov/pub/irs-pdf/p5992.pdf]
• Kim & Rosado LLP in San Jose and Walnut Creek was founded by former IRS Office of Chief Counsel attorneys who handle equity compensation tax situations for Silicon Valley clients

How RSU Vesting Creates Tax Exposure San Jose Employees Often Miss

Restricted stock units create ordinary income at the moment they vest — not when shares are sold. Many San Jose tech employees do not realize they owe significant tax in the year of vesting, independent of whether they sell any shares.

When an RSU vests, the fair market value of the shares is includable in the employee’s income and reported on their W-2 as ordinary compensation. That income is taxable at both federal and California ordinary income rates — which, for high earners in Santa Clara County, can reach combined marginal rates above 50%. The employer typically withholds a flat rate on RSU income. For many San Jose employees whose combined federal and California rate exceeds that withholding rate, the result is an unexpected balance due. [Source: IRS.gov, US Taxation of Stock-Based Compensation, irs.gov/newsroom, 2025]

The Multi-Year Vesting Trap

RSU vesting schedules typically run over four years. An employee who received a grant at a prior employer, moved to a new company, relocated from another state, or worked abroad during any portion of the vesting period may face income sourcing questions that affect both federal and California tax liability. California’s Franchise Tax Board taxes RSU income sourced to California regardless of where the employee lived when the shares were sold.

For San Jose residents who vested shares while working partly in another state — or partly outside the United States — the allocation of income between jurisdictions requires calculation that goes beyond what standard tax software handles reliably. The Tax Preparation and Planning page at Kim & Rosado LLP covers how the firm handles equity compensation situations for Silicon Valley employees and executives. [Source: IRS.gov, CCA 202327014, irs.gov/pub/irs-wd/202327014.pdf, 2023]

What San Jose Tech Workers Need to Understand About ISO Tax Treatment

Incentive stock options receive different federal tax treatment from RSUs — no income recognized at exercise for regular tax purposes — but they carry an alternative minimum tax exposure that surprises many San Jose employees who exercise and hold.

The IRS confirms that for regular income tax purposes, no income is recognized when an ISO is exercised. That tax-free exercise is one of the primary reasons ISOs are valued by employees at private and pre-IPO companies in Silicon Valley. The benefit has a counterpart that many employees discover after the fact: the spread between the exercise price and the fair market value at exercise is an AMT adjustment that can generate significant AMT liability in the year of exercise, even when no shares are sold. [Source: IRS.gov, Instructions for Form 6251, irs.gov/instructions/i6251, 2025]

The $100,000 Annual ISO Limitation

Federal law places a $100,000 annual limit on the value of ISOs that can first become exercisable during any calendar year, based on fair market value at the time of grant. ISOs exceeding that limit convert to non-statutory stock options for the excess amount, which changes the tax treatment entirely. [Source: IRS.gov, Equity Compensation Audit Technique Guide, irs.gov/pub/irs-pdf/p5992.pdf]

California does not conform to the federal ISO tax preference. California taxes ISO exercises as ordinary income at the state level — meaning a San Jose employee who exercises ISOs and owes no federal regular tax may still owe California income tax on the same event. The combination of federal AMT exposure and California ordinary income tax on the same ISO exercise requires planning that starts before the exercise, not after. For options situations that have already created IRS or FTB exposure, see the Tax Resolution page.

When Silicon Valley Equity Events Lead to IRS Scrutiny

The IRS publishes specific audit technique guides for equity compensation — meaning examiners receive specific training to identify errors in how stock options, RSUs, and employee stock purchase plans are reported. San Jose tech workers with unreported or misreported equity income are not flying under the radar.

The IRS uses an equity compensation audit technique guide that instructs examiners to review Form W-2 reporting, Form 3921 for ISO exercises, Form 3922 for ESPP transactions, and company proxy statements to identify compensation that was not properly reported. [Source: IRS.gov, Equity Compensation Audit Technique Guide, irs.gov/pub/irs-pdf/p5992.pdf] The common errors examiners look for include: RSU income omitted from income because the employee did not recognize vesting as a taxable event; ISO exercises with AMT adjustments not reported on Form 6251; disqualifying dispositions of ISOs reported as capital gains instead of ordinary income; and ESPP discount income not included in W-2 wages.

What Former IRS Attorneys Know About These Examinations

Anthony Kim handled equity compensation cases from inside the IRS Office of Chief Counsel before leading tax controversy work at Ernst & Young. Nicholas Rosado served in the same office and now represents clients before the IRS, the US Tax Court, and the Ninth Circuit Court of Appeals. Both have seen how the IRS approaches equity compensation audits from both the government and the taxpayer side — a perspective that changes how these cases get evaluated and resolved for San Jose and Santa Clara County clients. For prior client outcomes, see the testimonials page.

What San Jose Founders and Startup Employees Face Beyond Equity Compensation

Founders and early-stage employees in Silicon Valley deal with tax situations that go beyond vesting schedules — Section 83(b) elections, qualified small business stock exclusions, and Section 409A compliance each carry significant implications for how equity is taxed throughout a company’s lifecycle.

A Section 83(b) election, which allows a founder or early employee to pay tax on unvested stock at the time of grant rather than at vesting, has significant long-term consequences. The IRS now accepts 83(b) elections electronically, which changed the filing process as of July 2025. The decision to make that election involves weighing current tax cost against projected appreciation — a judgment that benefits from professional input before the 30-day election window closes. [Source: IRS.gov, Publication 525, irs.gov/publications/p525, 2025]

Qualified Small Business Stock exclusions under Section 1202 allow eligible founders and investors to exclude up to 100% of capital gain on QSBS held for more than five years, subject to per-issuer limits. Section 409A compliance requirements govern deferred compensation arrangements that non-qualifying startups sometimes create inadvertently. Each of these areas intersects with California’s non-conformity rules in ways that require attention to both federal and state outcomes simultaneously.

Kim & Rosado LLP serves San Jose founders, executives, and technology employees across the full spectrum of equity compensation tax situations — from proactive planning through IRS examination and resolution. The Business and Nonprofit page covers the firm’s services for startups and growing companies throughout Santa Clara County. Schedule a consultation to discuss your situation with the team.

This article is for informational purposes only and does not constitute legal advice. Every tax situation is unique. Contact a qualified tax attorney at Kim & Rosado LLP for guidance specific to your circumstances.

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