2025 Update: Tech Company Stock Pay Accounts for One-Quarter of Withholding Growth So Far in 2025-26

As we outlined in 2023 and again in 2024, compensation in the form of company stock at California's large technology companies has become an increasingly large contributor to state income tax withholding. As the AI boom has supercharged California's tech landscape, including sending stock prices for these companies much higher, the market value of stock pay options (and thus the state income tax that must be withheld on those options) has grown commensurately. 

Background

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 stock compensation 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 Stock Compensation as Part of Employees’ Pay. Stock compensation is a form a pay that provides employees stock shares in the company. There are several types of stock compensation. One common type is restricted stock units (RSUs), through which a company makes installment stock payments to employees (each payment is known as vesting). RSUs often vest monthly or quarterly. 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 stock 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 Technology Sector

California’s Tech Companies Have Become the World’s Most Valuable Companies. The state’s five largest tech companies—Apple, Google, Nvidia, Broadcom, and Meta—are currently worth $15 trillion. Including California’s other large technology firms, the state’s tech companies make up more than 60 percent of the total value of the Nasdaq 100 index, a list of the 100 most valuable companies listed on the Nasdaq stock exchange.

Assessing Stock Pay's Role in Recent Strong Income Tax Collections

With Stock Price Run-Up, Stock Pay Now a Large Share of State Income Tax Withholding. As California's tech companies have grown in size and value, stock pay withholding has increased as a share of total income tax receipts. The figure below illustrates this growth over the past several years. Overall state income tax withholding from stock pay at California technology companies appears to be holding steady at about 10 percent of total income tax withholding. This amounts to roughly $10 billion annually in stock pay income tax withholding payments. (These figures are based on our office's analysis of recent financial reports, including assumptions about what share of their workforce resides in California and the distribution of withholding between state and federal governments.)

After Slow Start to 2025, Stock Pay Again Boosting Income Tax Growth to Start 2025-26. After two meager quarters to start 2025, RSU withholding has again reached new heights. Year-over-year growth in RSU withholding accounted for more than one-quarter of overall income tax withholding gains during the first quarter of 2025-26. This contribution factor is on-par with calendar year 2024 when RSU withholding boosted quarterly withholding growth by roughly $1 billion per quarter. 

So Far in 2025, Non-RSU Withholding Growing Briskly as Well.  During 2023 and the first half of 2024, equity-pay withholding accounted for most of the year-over-year growth in income tax withholding receipts. The figure above reflects this dynamic, in which non-RSU withholding (in dark green) contributed little to annual withholding growth during 2023 and early 2024. Since then, however, non-RSU withholding has grown more briskly and now accounts for historically solid withholding growth on its own.

Source of Non-RSU Withholding Strength Remains Unclear, But Signs Point to Stock Market. Non-RSU withholding is growing about 8 percent annually. The underlying source of this strength remains unclear — employment across the state has been essentially flat and total pay is up only about 2 percent annually. Together, job and wage growth likely account for only a small portion of the solid non-RSU withholding growth. The source of the remaining contributions remains unclear at this time, although history suggests the remaining strength may also be tied to the stock market (but not directly via RSUs at the state's largest technology companies). Looking back at 2022Q4, year-over-year withholding declined by nearly $3 billion, but only a small portion of that was due to a year-over-year drop in RSUs. Employment and wages were largely flat during the period, which coincided with a substantial stock-market correction. In our view, this suggests the remaining current strength in non-RSU withholding is indirectly tied to the stock market in ways we cannot yet capture with available data.