If you work at a Washington startup — or any company that pays you in equity — ESSB 6346 just changed the math on your stock options and RSUs.
The new 9.9% income tax applies to household income above $1 million, starting January 1, 2028. For most W-2 employees, that's straightforward. But equity compensation creates spikes in income that can push you over the $1 million threshold in a single year, even if your base salary is well below it.
Here's how the new tax interacts with the most common forms of equity comp — and what you can do about it before 2028.
How the Tax Works: A Quick Primer
ESSB 6346 starts with your federal adjusted gross income (IRC §62), applies a series of modifications (sections 302 through 308 and 401 through 407), and arrives at "Washington base income." From there, further modifications (sections 309 through 314) — including a $1,000,000 standard deduction — produce "Washington taxable income." The tax rate is 9.9% on that amount.
For equity compensation, the critical question is whether and when income from your stock hits your federal AGI. If it does, it flows into Washington taxable income. If it doesn't — as with certain ISO exercises — it stays out.
For the full overview of the law, see Washington's New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know.
Incentive Stock Options (ISOs)
ISOs are tricky under ESSB 6346 because they're tricky everywhere.
When you exercise an ISO, you don't recognize ordinary income for federal purposes (assuming you hold the shares). The spread between the exercise price and fair market value counts for Alternative Minimum Tax (AMT) purposes — but AMT is a separate computation. It does not flow through your federal AGI.
This matters because ESSB 6346 starts with federal AGI, and we confirmed that the statute contains no provision adding back AMT preference items (sections 302 through 308 contain no AMT add-back). That means a pure ISO exercise-and-hold should not push you over the $1 million threshold for Washington purposes.
But if you exercise and sell in the same year — a disqualifying disposition — the spread is ordinary income. It hits your AGI, flows into Washington base income, and is subject to the 9.9% tax above the threshold.
Planning implication: The hold vs. sell decision now has a state tax dimension it didn't have before. If you can hold long enough for long-term capital gains treatment and your stock qualifies as QSBS, you may escape both federal and state tax on the gain entirely. If you sell immediately, you're looking at federal ordinary income rates plus 9.9% to Washington on everything above the threshold.
Nonqualified Stock Options (NQSOs)
NQSOs are more straightforward — and more exposed.
When you exercise an NQSO, the spread between the exercise price and fair market value is ordinary income. It shows up on your W-2, hits your AGI, and flows directly into Washington taxable income.
If your base salary is $400,000 and you exercise NQSOs with a $900,000 spread, your combined income is $1.3 million. After the $1 million standard deduction under Section 314 of the act, Washington taxes $300,000 at 9.9%: that's $29,700 in state income tax you wouldn't have owed before 2028.
Planning implication: Timing your NQSO exercises matters more than ever. If you're close to the $1 million threshold, consider whether spreading exercises across two tax years keeps you below it in both — versus one large exercise that triggers the tax. This is especially relevant in 2027, when you could split exercises between the last no-tax year and the first taxable year.
Restricted Stock Units (RSUs)
RSUs are the most common equity comp at large tech companies in Washington — Amazon, Microsoft, Meta, Google — and they have the simplest tax treatment, which also means the most direct exposure to the new tax.
When RSUs vest, the fair market value is ordinary income. Period. It's on your W-2, in your AGI, and fully includable in Washington taxable income.
For many senior engineers and directors at major tech companies, RSU vesting alone can push total comp above $1 million — especially in strong stock price years. If your base is $250,000 and $800,000 in RSUs vest this year, you're at $1,050,000. After the $1 million standard deduction, you owe Washington 9.9% on the $50,000 overage: $4,950.
The problem: You can't control when RSUs vest. Unlike options, you can't time the exercise. The vesting schedule is set, and the income recognition happens automatically. Your planning levers are limited: the overall compensation structure (negotiating more base vs. RSUs), deferring RSU settlements if the plan allows it, or — more realistically — planning around the tax rather than avoiding it.
The 83(b) Election Angle
If you receive restricted stock (not RSUs — actual restricted stock subject to vesting), you can file an 83(b) election to recognize the income at grant rather than at vesting.
Before 2028, this is a meaningful planning opportunity: if you're granted restricted stock when its value is low, filing an 83(b) election now means you recognize a small amount of income in a year when Washington has no income tax. When the stock later vests and is worth significantly more, there's nothing left to recognize. The gain, if any, would be capital gain when you sell — and if the stock qualifies as QSBS, that gain may be excluded entirely.
We reviewed the statute and found no transition rules or lookback provisions that would claw back pre-2028 income recognition. This is the kind of pre-2028 move that can save real money, but it requires acting before the tax takes effect.
For a full explanation of how 83(b) elections work, see our Complete Guide to 83(b) Elections for Startup Founders and Employees.
What About QSBS?
This is where it gets interesting for startup equity specifically.
If your stock qualifies as Qualified Small Business Stock under Section 1202, and you hold it for five years, the federal capital gain exclusion is up to $15 million (or 10x your basis). Because the QSBS exclusion operates at the federal level — it reduces your AGI — Washington inherits it automatically. ESSB 6346 starts with federal AGI, and excluded QSBS gains simply aren't in it.
Additionally, Section 302 of the act strips long-term capital gains from AGI and replaces them with Washington capital gains tax amounts. Sales or exchanges exempt under RCW 82.87.050 — which includes QSBS — are excluded from this computation entirely.
So the path for startup equity looks like this:
- Receive stock in a qualifying C corporation
- File an 83(b) election (if applicable) while the value is low — ideally before 2028
- Hold for 5+ years
- Sell and exclude the gain from both federal and Washington income tax
That's the best-case scenario for startup founders and early employees. But each step has requirements, and missing any of them can be expensive.
For the full QSBS analysis, see Does QSBS Avoid Washington's New 9.9% Income Tax? and our Complete Guide to QSBS & Section 1202.
Key Dates and Timing
The 9.9% tax takes effect January 1, 2028. That gives you roughly 20 months to:
- Exercise ISOs while there's no state income tax on the spread (and consider whether to hold or sell)
- File 83(b) elections on newly granted restricted stock to lock in low-value recognition in a zero-state-tax year
- Accelerate NQSO exercises if you're going to exercise anyway and want to avoid the state tax
- Evaluate your RSU vesting schedule and consider whether a compensation restructuring conversation with your employer makes sense
After January 1, 2028, every dollar of equity compensation income above the $1 million standard deduction is subject to the 9.9% rate. The planning window is finite.
The Bottom Line
Equity compensation was already complicated. Washington's income tax adds another layer — but it's a manageable one if you plan ahead. The key variables are the type of equity (ISO vs. NQSO vs. RSU vs. restricted stock), the timing of exercises and sales, whether QSBS applies, and whether you can structure recognition events before 2028.
This is exactly the kind of situation where getting advice in 2026 or 2027 costs a fraction of what the tax will cost in 2028 and beyond.
For a complete overview of ESSB 6346, see Washington's New Income Tax: What Founders, Investors, Athletes, and High Earners Need to Know.
For more on Washington's full tax landscape, see the Complete Guide to Washington State Taxes for Startups.
Have equity compensation questions in light of Washington's new tax? Book a call to discuss your specific situation.
