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If it's paid out as ordinary (W-2) income, then your top federal tax rate right this minute is 39.35% (37% regular tax, 1.45% medicare tax, 0.9% medicare surtax

If it's paid out as ordinary (W-2) income, then your top federal tax rate right this minute is 39.35% (37% regular tax, 1.45% medicare tax, 0.9% medicare surtax). If it's paid out as some sort of investment income not subject to long-term capital gains treatment (e.g. interest, non-qualified dividends), then your top federal rate is 40.8% (37% regular, 3.8% net investment tax). That does assume $500k of taxable income not counting the payout we're talking about here, to hit that 37% tax bracket. If you have kids, you can hit these sorts of marginal rates at lower incomes too, because of the 5% marginal tax rate from the child credit phaseout. I should note that money is fungible, so the fact that some of this is claimed to be "medicare" tax and some is claimed to be "income" tax is irrelevant to both the person paying the tax and the government collecting the tax. Medicare is not funded solely by the "medicare" tax in practice, so the fact that there's a separate tax is more or less an accounting oddity.

TuringNYC 6y ago
>> If it's paid out as ordinary (W-2) income, then your top federal tax rate right this minute is 39.35% (37% regular tax, 1.45% medicare tax, 0.9% medicare surtax). There is also state tax, which can be significant (double digits), esp for top brackets.
- bzbarsky 6y ago
  Indeed. That varies widely, though, and corporations are subject to it too, with its own weirdnesses, so I was trying to stick to apples-to-apples federal tax comparisons.
  - TuringNYC 6y ago
    I does vary widely, but the weighted majority of all such cases are in California (and NY might be next.) Those two states happen to have among the highest state taxes also. Consider this: Where were the last 20 major IPOs? The last 20 major acquisitions? Where were the founding teams (i.e., the ones with the most stock facing such issues.) ...I'll bet 80% or more of these were in CA. I'm only pointing this out because once you're a super-successful startup and you've gone thru all the steps for a successful liquidity event, there is the final bath of taxes :-/

TuringNYC 6y ago

>> If it's paid out as ordinary (W-2) income, then your top federal tax rate right this minute is 39.35% (37% regular tax, 1.45% medicare tax, 0.9% medicare surtax). There is also state tax, which can be significant (double digits), esp for top brackets.

bzbarsky 6y ago
Indeed. That varies widely, though, and corporations are subject to it too, with its own weirdnesses, so I was trying to stick to apples-to-apples federal tax comparisons.
- TuringNYC 6y ago
  I does vary widely, but the weighted majority of all such cases are in California (and NY might be next.) Those two states happen to have among the highest state taxes also. Consider this: Where were the last 20 major IPOs? The last 20 major acquisitions? Where were the founding teams (i.e., the ones with the most stock facing such issues.) ...I'll bet 80% or more of these were in CA. I'm only pointing this out because once you're a super-successful startup and you've gone thru all the steps for a successful liquidity event, there is the final bath of taxes :-/