How much tax and cash do I need to exercise my stock options?
See the 2026 federal and payroll tax on exercising NSOs or ISOs, the alternative minimum tax on ISOs you keep, and how many ISOs you can exercise before AMT starts.
Type of option
The spread is taxed as wages when you exercise: income tax, Social Security and Medicare tax, and state tax.
Filing status
TAX AT EXERCISE
$14,629
Exercising 5,000 options at $2 when the shares are worth $10 costs $10,000 and creates a $40,000 spread, taxed as wages: $9,600 of federal income tax, $3,029 of Social Security and Medicare tax and $2,000 of state tax, $14,629 in all (37% of the spread). Your employer withholds $8,800 of federal tax, so about $800 more is due with your return.
Cost to exercise
$10,000
Spread
$40,000
Tax rate on spread
37%
Cash to plan for
$24,629
The same options under each type
| Type | Tax now | Cash to plan for | How it is taxed |
|---|---|---|---|
| Nonstatutory (NSO) (yours) | $14,629 | $24,629 | Wages: income tax, payroll tax, state |
| ISO, keep the shares | $1,053 | $11,053 | AMT only, if any |
| ISO, sell the same year | $11,600 | $21,600 | Ordinary income: income tax, state |
For the same 5,000 options, the tax at exercise is $14,629 as an NSO, $1,053 as an ISO you keep, and $11,600 as an ISO you sell the same year. An ISO you keep pays less now, but the shares are worth less if the price falls before you sell, and the AMT paid can be recovered as a credit only over later years.
Does the alternative minimum tax apply?
| AMT worksheet | Amount |
|---|---|
| Income before the exercise | $140,650 |
| Spread (already in regular income) | $40,000 |
| AMT income (no standard deduction) | $180,650 |
| Exemption | $90,100 |
| Amount taxed at 26% and 28% | $90,550 |
| Tentative minimum tax | $23,543 |
| Regular tax | $32,090 |
| AMT owed | $0 |
The AMT is the excess of the tentative minimum tax over the regular tax. The standard deduction is not allowed for it, so AMT income starts from $140,650 with the spread already counted; the 2026 exemption is $90,100. The tentative tax of $23,543 is not above the regular tax of $32,090, so no AMT is owed.
What moves the needle
Each row re-runs the calculation with one change. Click to apply.How it's computed
FORMULA
Spread = (share value at exercise − exercise price) × options; cost to exercise = exercise price × options
NSO: extra federal tax = tax on (income + spread) − tax on income; payroll tax on the spread; state rate × spread; withholding = 22% to $1 million of supplemental pay, 37% above
ISO kept: no regular tax; AMT income = income + spread (the standard deduction is added back)
Exemption = $90,100 single / $140,200 joint, less 50¢ per dollar of AMT income above $500,000 / $1,000,000
Tentative minimum tax = 26% × the first $244,500 above the exemption + 28% × the rest; AMT = tentative − regular tax, if positive
- Your income before the exercise is $140,650 (wages less the 401(k) deferral) and there is nothing else on the return: no other gains, no itemized deductions, no credits. Filing single.
- An NSO’s spread is taxed as wages in the year you exercise, assuming the shares are vested; an ISO’s is not regular income when you exercise (IRS Topic 427; Publication 525). ISOs are exempt from Social Security and Medicare tax (26 U.S.C. § 3121(a)(22)).
- The AMT paid on an ISO you keep can produce a credit that offsets regular tax in later years (Form 8801). The page does not model it, nor the tax when you later sell, which depends on the price then and on whether you held the shares more than a year after exercise and two years after the grant.
- State tax is a flat 5.0% on the spread for an NSO and an ISO you sell; most states do not tax an ISO you keep until you sell it, and a few have their own AMT. Local taxes are not included.
- The share count, exercise price and share value are examples until you replace them. For a private company, the value on exercise is the company’s 409A valuation, and the shares may not be sellable to cover the tax.
WORKED EXAMPLE · SAMPLE NUMBERS
Spread: ($10 − $2) × 5,000 options = $40,000; it costs $10,000 to exercise. Federal income tax rises by $9,600, Social Security and Medicare tax is $3,029 and state tax is $2,000: $14,629 in all. $8,800 is withheld, leaving $800 due with the return.
SOURCES
[1]Topic no. 427, Stock optionsInternal Revenue Service[2]Publication 525, Taxable and Nontaxable Income (stock options)Internal Revenue Service[3]Instructions for Form 6251, Alternative Minimum TaxInternal Revenue Service[4]Topic no. 556, Alternative minimum taxInternal Revenue Service[5]Rev. Proc. 2025-32 §3.10: 2026 AMT exemption amounts and thresholdsInternal Revenue Service, 2025[6]26 U.S. Code § 3121(a)(22): incentive stock option remuneration is not wages for payroll taxLegal Information Institute, Cornell Law School[7]Publication 15 (Circular E), section 7: Supplemental WagesInternal Revenue ServiceHSBuilt by Hussain Sehorewala · checked against worked examples · Sep 29, 2026
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Questions about this result
The spread, the share value minus your exercise price, is ordinary income in the year you exercise, taxed like wages: federal income tax at your rates, Social Security and Medicare tax, and state tax. On the example on this page, 5,000 options at $2 with shares worth $10, the $40,000 spread costs $14,629 of tax, about 37% of the spread. Your employer withholds 22% of it for federal tax, which here leaves $800 more due with your return.
Not as regular income and not for Social Security or Medicare tax, but the spread counts toward the alternative minimum tax. On the example, exercising the same 5,000 options as an ISO you keep owes $1,053 of AMT, and about 4,493 options fit before AMT starts. The AMT can come back as a credit against regular tax in later years.
The AMT is a second tax calculation that adds back some benefits, including the standard deduction and the ISO spread. You owe the AMT when the tentative minimum tax, 26% up to $244,500 above the exemption and 28% after, is more than your regular tax. The 2026 exemption is $90,100 for a single filer and $140,200 for a married couple filing jointly, and it phases out at high incomes.
The spread becomes ordinary income with no payroll tax and no AMT adjustment. On the example that is $11,600 of tax, less than the $14,629 an NSO would owe because no Social Security or Medicare tax applies. You give up the chance at long-term capital gains treatment, which needs the shares held until the later of one year after exercise and two years after the grant.
The exercise price times your options, plus the tax if you pay it yourself: $10,000 plus $14,629 for the NSO example. Many companies let you cover both by selling some shares; a private company may not let you sell at all, so check before you exercise.
The AMT credit in later years, state AMT, the tax when you later sell the shares, itemized deductions, other income and gains on your return, and any tender offer or liquidity event at a private company. Treat the result as an estimate to bring to a tax professional.
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