November 16, 2023
Summary. California’s technology companies are some of the most valuable companies in the world. These companies support thousands of high-paying jobs throughout the state. Many of these workers receive equity pay as part of their compensation package (such as stock options). One common form of equity compensation is treated as ordinary income, meaning employers must withhold a portion of the stock to pay state income tax. This form of income tax withholding has grown significantly—to more than 6 percent in recent years. Because the value of equity compensation (and thus the amount of withholding due) is based on the company’s stock price, recent tech stock price gains have boosted otherwise weak income tax withholding. Without the stock price gains, current year withholding receipts would be down 1 percent relative to last year, rather than up 1 percent.
California Employers Make Regular Income Tax Withholding Payments for Their Employees. These amounts are reported every weekday, providing a real-time indication of the direction and magnitude of aggregate change in the employers’ payroll. Most withholding payments are for employees’ normal wages and salaries. A growing share of withholding, however, comes from bonuses and equity compensation (stock options) paid to employees.
Most Personal Income Tax (PIT) Revenue Comes from Paycheck Withholding. The state collects about 70 percent of overall PIT revenue via wage and salary withholding. Other sources include income taxes paid on business income, financial earnings, retirement income, and capital gains.
Tech Companies Often Include Equity Compensation as Part of Employees’ Pay. Equity compensation provides employees stock shares in the company. There are several types of equity compensation. One common type is restricted stock units (RSUs), through which a company makes installment stock payments to employees (known as vesting). RSUs typically vest four times per year. When an employee’s RSUs vest, each RSU becomes one share of the company’s stock. Each share is valued at the company’s share price on the day the RSU vests.
Companies Must Make Withholding Payments When an Employee Earns RSU Stock. Unlike some other forms of equity compensation, vested RSU stock is treated as ordinary income for tax purposes. As such, employers must withhold a portion of the income to meet the employee’s state and federal tax obligations. Employers typically sell a portion of the employee’s vested stock and use the sale proceeds to make the withholding payment.
California’s Tech Companies Have Become Some of the World’s Most Valuable Companies... The state’s four largest tech companies—Apple, Google, Nvidia, and Meta—are currently worth more than $7 trillion. Including California’s other large technology firms, the state’s tech companies make up more than one-third of the total value of the Nasdaq 100 index, a list of the 100 most valuable companies listed on the Nasdaq stock exchange.
… Meaning Equity Pay Withholding Is A Growing Share of Income Tax Revenue. As California’s tech companies have grown, equity pay withholding has increased as a share of total income tax receipts. The figure below illustrates this growth, with estimated withholding from the state’s largest tech companies—including Apple, Google, Nvidia, and Meta—growing a share of state income tax withholding. Based on a review of financial filings from large tech companies, state income tax withholding from equity pay at these companies has been at least $5 billion annually in recent years.
Estimated stock equity withholding from state's large tech companies, including Apple, Nvidia, Google, and Meta
Led by Artificial Intelligence Boom, California Tech Companies’ Stock Value Soared This Year. As shown in the figure, stock prices for California’s largest tech companies—lead by Nvidia and Meta—have increased substantially this year. This jump, especially around May 2023, corresponded with a widespread stock market boom related to artificial intelligence. (Nvidia builds high-speed computer processors used in artificial intelligence applications.)
At Higher Stock Prices, Newly Vested RSUs Generate More Income Tax Withholding. As noted earlier, companies must withhold income taxes on vested RSUs based on the value of the company’s stock when the RSUs vest. With the recent uptick in stock prices for California’s large tech companies, income tax withholding also has increased. For example, state income tax withholding at Meta doubled—from about $250 million to about $500 million—in the third quarter of 2023 relative to the year before. State income tax withholding at Nvidia more than doubled over the same period.
What Effect Has Boost in Equity Withholding Had on State Tax Receipts This Year? Income tax withholding receipts for 2022-23 were about 3 percent lower than a year before. Without the boost in equity compensation withholding in the final quarter of 2022-23, receipts would have been 4 percent lower. For the current fiscal year, withholding receipts through September are running 1 percent higher than the same period last year. Without the boost in equity compensation in the first quarter of 2023-24, withholding receipts would instead be running about 1 percent lower.