If your company is planning an IPO and you hold RSUs, ISOs, or NSOs, the tax decisions you make in the 12–24 months before the offering will likely matter more than anything you do after. RSUs are taxed as ordinary income when they vest (or when a liquidity event triggers settlement), ISOs can trigger the Alternative Minimum Tax at exercise, and NSOs create ordinary income on the spread the day you exercise. Employees who wait until after the IPO to think about taxes routinely overpay by tens of thousands of dollars — or worse, owe tax on shares they can’t yet sell.

At Pasquesi Partners, a Chicago-based tax and accounting firm, we specialize in proactive tax planning for employees and founders at venture-backed companies heading toward a liquidity event. Here’s what you need to know — and what to do about it now.

Key Takeaways

RSUs are taxed as ordinary income at vesting or settlement. At IPO, “double-trigger” RSUs often vest all at once, creating a large income spike — and your employer’s default 22% withholding is usually not enough.
ISOs get favorable long-term capital gains treatment if you meet the holding periods, but the exercise spread is an AMT adjustment. Starting in 2026, OBBBA changes make AMT exposure meaningfully more likely for high earners.
NSOs generate ordinary income on the spread at exercise, plus payroll taxes, regardless of whether you sell.
The biggest planning wins — early exercise, AMT modeling, 83(b) elections, QSBS qualification, exercise timing — happen before the IPO, not after.
Illinois residents pay a flat 4.95% state income tax on equity compensation income on top of federal tax.

What’s the Difference Between RSUs, ISOs, and NSOs?

RSUs (Restricted Stock Units) are a promise of shares delivered when you vest. You don’t pay anything to receive them, and you’re taxed on the full value at ordinary income rates when the shares are delivered.

ISOs (Incentive Stock Options) are options that qualify for special tax treatment under IRC Section 422. If you hold the shares at least two years from grant and one year from exercise, your entire gain is taxed at long-term capital gains rates. The tradeoff: the spread at exercise counts as income for AMT purposes.

NSOs (Non-Qualified Stock Options) are options that don’t meet ISO requirements. The spread between your exercise price and fair market value is ordinary income the moment you exercise — subject to federal, state, Social Security, and Medicare tax.

Most pre-IPO employees hold a mix. Your grant agreements and stock plan documents tell you which is which — and if you’re not sure, that’s the first thing we review in a tax planning engagement.

How Are RSUs Taxed When My Company Goes Public?

RSUs are taxed as ordinary income at the fair market value of the shares on the date they’re delivered to you. For most private-company employees, RSUs carry a “double trigger”: they require both a time-based vesting condition and a liquidity event (like an IPO) before shares are actually delivered.

That structure has a major consequence: at IPO, several years of accumulated RSUs can settle at once. An employee with $400,000 of RSUs settling in the IPO year could see their taxable income double or triple overnight.

Three problems follow:

Under-withholding. Employers typically withhold at the 22% federal supplemental rate (37% only above $1 million of supplemental wages). If your actual marginal rate is 32–37%, you’re building a large April tax bill without realizing it.
The lockup problem. Most IPOs come with a 90–180 day lockup. You owe tax on the settlement-date value even if the stock drops 40% before you’re allowed to sell.
Estimated tax penalties. Without quarterly estimated payments or adjusted withholding, the IRS adds penalties on top.

What we do at Pasquesi Partners: we model your projected income across the IPO year, calculate the true withholding gap, set up safe-harbor estimated payments, and build a post-lockup selling plan that manages both concentration risk and your tax bracket across multiple years.

How Are ISOs Taxed — and Why Does the AMT Matter More in 2026?

Exercising ISOs doesn’t trigger regular income tax, but the spread between your strike price and the fair market value at exercise is an adjustment for Alternative Minimum Tax purposes. Exercise a large ISO block in a single year, and you can owe AMT on paper gains — on private shares you cannot sell.

This is more dangerous starting in 2026. Under the One Big Beautiful Bill Act (OBBBA), the AMT exemption phaseout thresholds dropped to $500,000 for single filers and $1,000,000 for married joint filers, and the phaseout rate doubled from 25% to 50%. The 2026 exemption amounts are $90,100 (single) and $140,200 (married filing jointly), but they now disappear much faster as income rises. Translation: high-earning tech employees who never worried about AMT before may hit it in 2026 — especially in a year with a big ISO exercise.

Smart ISO planning before an IPO includes:

Annual AMT “headroom” exercises. Exercising just enough ISOs each year to stay under your AMT crossover point — often over 2–4 years before the IPO — can move significant value into long-term capital gains treatment at little or no AMT cost.
Holding period tracking. Sell before the 2-year/1-year marks and you have a disqualifying disposition — the bargain element becomes ordinary income.
AMT credit recovery. AMT paid on ISO exercises generates a credit you can often recover in future years. We track and claim it so it doesn’t get lost.
The $100K limit. Only $100,000 of ISOs (by grant-date value) can become exercisable per year; the excess is treated as NSOs. Many employees don’t realize part of their “ISO” grant is actually NSOs.

How Are NSOs Taxed?

NSOs create ordinary income equal to the spread at exercise — taxed through payroll like a bonus, whether or not you sell a single share. Any growth after exercise is capital gain (long-term if you hold more than a year).

The planning questions for NSO holders before an IPO:

Exercise early at a low 409A valuation? If the spread is small, exercising early starts your capital gains clock and keeps the ordinary income hit minimal — but you’re putting real cash at risk in a private company.
Exercise-and-hold vs. exercise-and-sell after IPO? We model both, factoring in your bracket, Illinois’s 4.95% rate, the 3.8% Net Investment Income Tax, and your concentration risk.
Spread exercises across tax years? Splitting a large exercise across December and January can keep you out of the top bracket in both years.

Could My Shares Qualify for QSBS (and $15 Million Tax-Free)?

If you exercised options or received shares in a C-corporation while its gross assets were under the threshold, your stock may qualify as Qualified Small Business Stock under Section 1202 — potentially excluding millions of dollars of gain from federal tax entirely.

OBBBA expanded QSBS significantly for stock issued after July 4, 2025: the exclusion cap rose to $15 million, the gross asset limit increased to $75 million, and a new tiered schedule allows a 50% exclusion at 3 years and 75% at 4 years, with 100% at 5 years. For earlier-issued stock, the classic $10 million / 5-year rules still apply.

QSBS qualification is fact-intensive — original issuance, active business requirements, holding periods, and exercise dates all matter. This is exactly the analysis worth doing before the IPO, because your exercise decisions today determine whether the exclusion is available later. It’s one of the highest-value reviews we run for pre-IPO clients at Pasquesi Partners.

What Should I Do in the 12–24 Months Before My Company’s IPO?

Here’s the pre-IPO tax planning checklist we walk clients through:

Inventory every grant. Type (RSU/ISO/NSO), grant date, strike price, vesting schedule, and current 409A value.
Model the IPO-year income spike. Project RSU settlements, option exercises, and salary against 2026 brackets, AMT, NIIT, and Illinois tax.
Run the AMT crossover analysis. Determine how many ISOs you can exercise this year at minimal AMT cost — and repeat annually.
Check QSBS eligibility before making exercise decisions that could start (or fail to start) the 5-year clock.
Fix your withholding and estimated taxes. Safe-harbor payments prevent April surprises and penalties.
Plan the post-lockup sale strategy. Decide in advance what you’ll sell, when, and why — including whether a 10b5-1 plan makes sense — instead of reacting to stock price emotions.
Coordinate the bigger picture. Charitable giving (including donating appreciated shares), retirement plan contributions, and multi-year bracket management can meaningfully reduce the total tax on your equity windfall.

Why Work With a Chicago Tax Firm That Specializes in Equity Compensation?

Most tax preparers see an IPO once in a career. At Pasquesi Partners, equity compensation planning is a core specialty. Founded by Rob Pasquesi — a CPA and MBA with Big Four and Grant Thornton experience — our firm works with startup employees, founders, and high-net-worth individuals across Chicago and nationwide.

What working with us looks like:

Proactive planning, not just filing. We build multi-year exercise and sale strategies before the IPO — because by the time you file, the biggest decisions are already locked in.
Full modeling. Federal, AMT, NIIT, and Illinois projections for every scenario, so you see the real after-tax numbers before you act.
Year-round support. Quarterly estimates, withholding adjustments, disqualifying disposition tracking, and coordination with your financial advisor.
Chicago roots. Based in Lincoln Park, we work with employees at venture-backed companies throughout Chicagoland — and remotely across the country.

Your company’s IPO is a once-in-a-career financial event. Don’t let taxes take a bigger bite than they should. Schedule a consultation with Pasquesi Partners to build your pre-IPO tax plan today.

Frequently Asked Questions

Do I owe taxes on RSUs if I can’t sell my shares during the IPO lockup?

Yes. RSUs are taxed at ordinary income rates based on the share value on the settlement date, even if a lockup period prevents you from selling for 90–180 days. If the stock falls during the lockup, you still owe tax on the higher settlement-date value. This is why withholding review and cash planning before the IPO are essential.

Will exercising my ISOs trigger the Alternative Minimum Tax?

It depends on the size of the spread and your other income. The ISO exercise spread is an AMT preference item, and starting in 2026, lower phaseout thresholds ($500,000 single / $1,000,000 joint) and a faster 50% phaseout rate make AMT more likely for high earners. An AMT crossover analysis tells you how much you can exercise each year with little or no AMT cost.

Should I exercise my stock options before my company goes public?

Often, yes — exercising while the 409A valuation is low can minimize ordinary income (NSOs) or AMT exposure (ISOs) and start your long-term capital gains holding period. But it requires cash, carries risk if the company never achieves liquidity, and should be based on a full tax projection, not a guess.

How much tax will I pay on my RSUs in Illinois?

RSU income is taxed at your federal marginal rate (up to 37%), plus Illinois’s flat 4.95% state income tax, plus Medicare taxes and potentially the 0.9% additional Medicare tax. Combined rates above 40% are common for IPO-year employees — while employers typically withhold only 22% federal. Planning for the gap is critical.

What is a disqualifying disposition of ISO shares?

Selling ISO shares before holding them two years from grant and one year from exercise converts the bargain element into ordinary income, losing the long-term capital gains benefit. Sometimes a deliberate disqualifying disposition is still the right move — for example, selling in the exercise year to eliminate AMT — but it should be a modeled decision, not an accident.

How do I get started with pre-IPO tax planning at Pasquesi Partners?

Contact us for an initial consultation. We’ll review your grant documents, build a multi-year projection, and deliver a written exercise and sale strategy tailored to your equity, income, and goals.