Ordinary Income Taxes

Ordinary income tax is the tax you pay on wages, salary, bonuses, RSU vesting income, and most other compensation. For a software engineer at Google, Meta, Amazon, Apple, or Microsoft, ordinary income tax is not a peripheral concern — it is the dominant tax in their financial life. Total compensation packages at senior levels routinely reach $300,000–$1,000,000 or more per year, and the vast majority of that compensation is taxed as ordinary income at the highest federal and state rates.

Understanding the mechanics of ordinary income taxes — how brackets actually work, what gets included in taxable income, which deductions reduce it, and how California and Washington treat it differently — is the foundation of every other tax planning decision. Getting this wrong means overpaying on the income that represents the core of a FAANG compensation package for an entire career.

The Federal Ordinary Income Tax Brackets for 2026

The United States uses a progressive marginal rate system. Each bracket rate applies only to the income within that bracket — not to all income. The 2026 federal brackets for ordinary income are:

• 10% — up to $12,400 (single) / $24,800 (married filing jointly)
• 12% — $12,400–$50,400 (single) / $24,800–$100,800 (MFJ)
• 22% — $50,400–$105,700 (single) / $100,800–$211,400 (MFJ)
• 24% — $105,700–$201,775 (single) / $211,400–$403,550 (MFJ)
• 32% — $201,775–$256,225 (single) / $403,550–$512,450 (MFJ)
• 35% — $256,225–$640,600 (single) / $512,450–$768,700 (MFJ)
• 37% — above $640,600 (single) / $768,700 (MFJ)

A common misconception is that entering the 37% bracket means paying 37% on all income. It does not. A single filer earning $700,000 pays 10% on the first $11,925, 12% on the next $36,550, 22% on the next $54,875, and so on — with only the income above $626,350 taxed at 37%. The effective federal rate on $700,000 of income is approximately 32–33%, not 37%.

What matters for planning is the marginal rate — the rate on the next dollar of income. For most senior FAANG employees, any additional bonus, vesting RSU, or other income is taxed at 37% federally. Any deduction — a 401(k) contribution, a charitable gift, a business expense — saves tax at 37 cents on the dollar. The marginal rate is the planning rate.

What Counts as Ordinary Income for FAANG Employees

The following income categories are taxed as ordinary income at federal rates:

• Base salary and wages — the straightforward part. Every dollar of salary is ordinary income subject to federal, state, and payroll taxes.
• Cash bonuses — annual performance bonuses, signing bonuses, and retention bonuses are all ordinary income in the year received. A $100,000 signing bonus at Google in 2026 is fully taxable as ordinary income in 2026 regardless of whether it is paid in January or December.
• RSU vest-date value — when restricted stock units vest, the fair market value of the shares on the vest date is ordinary income reported on your W-2. If 200 shares of Amazon vest when the stock is at $225/share, $45,000 is ordinary income in that tax year. This occurs automatically at every vest event — you do not need to sell the shares for the income to be recognized.
• NSO exercise spreads — when you exercise a non-qualified stock option, the spread between the exercise price and the fair market value at exercise is ordinary income. Exercising 1,000 NSOs with an exercise price of $50 when the stock is at $200 generates $150,000 of ordinary income, regardless of whether you immediately sell the shares.
• ESPP ordinary income element — the discount received in an Employee Stock Purchase Plan, and sometimes a portion of additional appreciation, is treated as ordinary income in the year of a disqualifying disposition.
• Traditional 401(k) and IRA distributions — withdrawals from pre-tax retirement accounts are ordinary income in the year of distribution. Roth distributions (when qualified) are not ordinary income. This distinction has major implications for retirement tax planning.
• Interest income — interest from savings accounts, CDs, Treasury bonds, and corporate bonds is ordinary income. Municipal bond interest is generally exempt from federal ordinary income tax (and from California and Washington taxes as well, if issued by those states).
• Short-term capital gains — gains on assets held for one year or less are taxed at ordinary income rates, not at the lower capital gains rates. For a California FAANG employee, short-term gains are taxed at up to 37% federal plus 13.3% California.
• Non-qualified dividends — dividends that do not meet the IRS definition of "qualified" are taxed at ordinary income rates. Most dividends from U.S. corporations held in standard accounts are qualified and receive lower rates, but dividends from REITs, money market funds, and certain foreign stocks are non-qualified ordinary income.

The Standard Deduction and How It Sets Your Taxable Income Floor

Ordinary income tax applies not to gross income but to taxable income — gross income minus above-the-line deductions minus either the standard deduction or itemized deductions, whichever is larger.

The 2026 standard deduction is $16,100 for single filers and $32,200 for married filing jointly. For most FAANG employees who do not own a home or who own a home in a high-tax state where the SALT cap limits itemized deductions, the standard deduction is often the simpler and sometimes the larger option.

Itemized deductions include state and local taxes (capped at $40,000 per return under the SALT cap), mortgage interest on loans up to $750,000, charitable contributions, and a few other items. A California homeowner with a $1,500,000 mortgage, $40,000 in annual mortgage interest, and $40,000 in SALT-capped state taxes has itemized deductions of $80,000 — well above the $32,200 MFJ standard deduction. For this household, itemizing saves tax on $47,800 more income at the marginal rate, worth approximately $17,686 in federal tax at 37%.

Above-the-Line Deductions: The Most Valuable Ordinary Income Reducers

Above-the-line deductions reduce Adjusted Gross Income (AGI) before the standard/itemized deduction choice. They reduce taxable income regardless of whether you itemize. For high-income tech workers, these are often the most impactful deductions available:

Traditional 401(k) contributions: The most universally available large deduction. The 2026 employee contribution limit is $23,500, plus a $7,500 catch-up contribution for employees age 50 and older, for a total of $31,000. At the 37% federal marginal rate, the maximum $23,500 contribution saves $8,695 in federal income tax. For a California resident also at the 13.3% state rate, the combined tax saving from a full 401(k) contribution is approximately $11,855. At FAANG companies that match contributions — Google typically matches 50% up to 3% of salary, for example — the pre-tax 401(k) is often the single highest-return investment available.

The after-tax mega backdoor Roth contribution extends the total 415(c) limit to $70,000 (2026) per person. After-tax contributions are not deductible from ordinary income, but if the plan allows in-service rollovers to a Roth IRA or Roth 401(k), the after-tax contributions convert to tax-free Roth growth — a structural benefit even without an immediate income tax deduction.

Health Savings Account (HSA) contributions: For employees enrolled in a High Deductible Health Plan, HSA contributions are deductible above the line. The 2026 limits are $4,300 for individual coverage and $8,550 for family coverage, plus a $1,000 catch-up for those 55 and older. An HSA is the only account with a triple tax advantage: contributions deduct from ordinary income, growth is tax-free, and qualified medical withdrawals are tax-free. For a California resident, there is a state-level exception: California does not recognize the HSA tax exemption. HSA contributions are deductible on the federal return but not on the California return, and California taxes HSA investment income annually. The federal benefit remains fully intact.

Traditional IRA contributions: Deductible for taxpayers who are not covered by a workplace retirement plan, or who are covered but earn below the phase-out range. The 2026 phase-out for traditional IRA deductibility begins at $79,000 (single) and $126,000 (MFJ) for those covered by a workplace plan. Most senior FAANG employees who participate in a 401(k) are above these thresholds and cannot deduct traditional IRA contributions — making the Backdoor Roth IRA the relevant strategy (non-deductible traditional IRA contribution, immediate conversion to Roth).

Student loan interest: Up to $2,500 is deductible above the line, subject to income phase-outs starting at $80,000 (single) and $165,000 (MFJ). Most senior FAANG employees are above these thresholds and cannot claim this deduction.

Self-employed retirement contributions: For FAANG employees who also have side income reported on Schedule C — consulting, contracting, advisory roles, content creation — a SEP-IRA or Solo 401(k) can shelter a meaningful portion of that income. A Solo 401(k) allows both employee contributions (up to $23,500) and employer contributions (up to 25% of net self-employment income), up to the $70,000 combined limit. For a software engineer earning $80,000 in side income, a Solo 401(k) could potentially shelter $40,000–$50,000 from ordinary income tax — saving approximately $18,500–$23,000 at the combined federal and California marginal rates.

Payroll Taxes: The Taxes Alongside Ordinary Income

Ordinary income from wages is subject not only to federal and state income tax but also to payroll taxes — Social Security and Medicare taxes. These are distinct from income taxes but apply to the same wage income.

• Social Security tax: 6.2% employee share (plus 6.2% employer share) on wages up to the 2026 Social Security wage base of $176,100. For a FAANG employee earning $300,000, Social Security tax applies only to the first $176,100 — $10,918 in employee Social Security tax. Income above the wage base is exempt from Social Security tax.
• Medicare tax: 1.45% on all wages with no cap. For wages above $200,000 (single) or $250,000 (MFJ), an additional 0.9% Additional Medicare Tax applies — bringing the effective Medicare rate to 2.35% on earned income above those thresholds. A FAANG employee earning $500,000 pays 1.45% on the first $200,000 and 2.35% on the remaining $300,000 — total Medicare tax of $9,950.

RSU vesting income and NSO exercise income are treated as supplemental wages subject to payroll taxes — Social Security tax up to the wage base and Medicare tax on the full amount. By the time most senior FAANG employees receive their first RSU vest of the year (often in February or March), their base salary alone has already exceeded the Social Security wage base. Subsequent RSU vests are therefore exempt from Social Security tax but remain subject to Medicare and Additional Medicare Tax.

California Ordinary Income Tax: The 13.3% Reality

California taxes all ordinary income — wages, bonuses, RSU vest income, interest, non-qualified dividends, and traditional retirement account distributions — at the same graduated rate schedule. The 2026 California brackets for married filing jointly:

• 1% — up to $20,824
• 2% — $20,824–$49,368
• 4% — $49,368–$77,918
• 6% — $77,918–$108,162
• 8% — $108,162–$136,700
• 9.3% — $136,700–$698,274
• 10.3% — $698,274–$838,302
• 11.3% — $838,302–$1,000,000
• 12.3% — $1,000,000–$1,340,026
• 13.3% — above $1,340,026

For single filers, the 9.3% bracket begins at $68,350 and the 13.3% rate applies above $1,000,000. California also imposes a 1% Mental Health Services Tax on income above $1,000,000, which is already incorporated into the 13.3% top rate.

California has no standard deduction equivalent to the federal standard deduction — the California standard deduction is a nominal $5,202 (single) or $10,404 (MFJ) in 2026, far below the federal amount. California also does not conform to the federal SALT cap for its own deduction purposes: on the California return, you deduct California income taxes paid, which is not subject to the same $40,000 cap that limits the federal SALT deduction. This creates a small offset: California income tax is deductible on the California return itself.

The critical planning point for California residents is that every dollar of ordinary income reduction — 401(k) contributions, HSA contributions, deductible business expenses — saves tax at the combined federal and California marginal rate. For a senior engineer at the 37% federal bracket and 13.3% California rate, each deductible dollar saves $0.503 in combined income taxes (before payroll tax considerations). This is the highest effective marginal rate on ordinary income in the United States.

Washington: No Income Tax on Ordinary Income

Washington has no state income tax on wages, salaries, bonuses, RSU vest income, interest, dividends, or traditional retirement account distributions. For the purposes of ordinary income taxation, a Washington resident's tax liability ends at the federal level.

This is the primary reason FAANG employees at Amazon and Microsoft in Seattle face a fundamentally different ordinary income tax picture than colleagues at Google and Meta in the Bay Area. An Amazon L6 engineer earning $400,000 in total compensation pays the same federal ordinary income tax as a Google L5 engineer with the same income — but saves $37,000–$52,000 annually in California state income tax simply by virtue of working in Seattle rather than Mountain View.

Washington does tax long-term capital gains above $278,000 at 7%–9.9% and imposes an estate tax on estates above $2,193,000 at rates up to 20%. But ordinary income — base salary, RSU vest income, bonuses, 401(k) distributions in retirement — is not subject to any Washington state tax. This makes Washington's no-income-tax status especially powerful for FAANG employees whose compensation is heavily weighted toward salary and RSU income rather than investment income.

Washington does impose a Business and Occupation (B&O) tax on gross receipts from business activities. For a Washington resident with Schedule C self-employment income — consulting, contracting, content creation — the B&O tax may apply at rates of 0.471%–1.5% of gross receipts, depending on the business classification. The B&O tax is not an income tax but a gross receipts tax, and it applies regardless of whether the business is profitable.

RSU Ordinary Income: The Tax Event That Happens Whether You Sell or Not

For FAANG employees, RSU vesting is the most frequent and often the largest ordinary income event after base salary. The mechanics create a tax obligation that is easy to overlook if you are not actively managing it.

When RSUs vest, the employer withholds shares to cover the estimated tax liability — a practice called "sell-to-cover" or "net settlement." If 300 Google shares vest and Google withholds 111 shares (37% of 300) for taxes, you receive 189 shares. The problem is that 37% withholding may not be enough. If your effective marginal rate — combining federal, California state, Additional Medicare Tax, and any other applicable taxes — is 50%–53%, the standard 37% supplemental withholding rate leaves you significantly under-withheld.

A California FAANG employee with combined marginal rates of 37% federal + 13.3% California + 2.35% Medicare = 52.65% owes 52.65 cents on every dollar of RSU vest income, but their employer withholds only 37–40 cents. The gap accumulates throughout the year as RSUs vest, and the resulting tax underpayment can result in a large tax bill in April — and potentially underpayment penalties if quarterly estimated tax payments are not made to compensate.

The IRS requires timely estimated tax payments — generally 25% of the annual tax liability each quarter — to avoid underpayment penalties. If your RSU withholding is insufficient, the shortfall must be made up through quarterly estimated tax payments to both the IRS and the California Franchise Tax Board. Missing these payments by the quarterly deadlines (April 15, June 15, September 15, January 15) results in interest charges even if you pay the full amount by April 15 of the following year.

The practical fix: calculate your expected total compensation at the start of each year — salary, expected RSU vests by vest schedule, anticipated bonus — and model the total federal and California tax liability. Determine the gap between expected withholding and actual liability. Make supplemental estimated tax payments each quarter to cover the gap, or elect to have additional withholding taken from payroll checks.

The Alternative Minimum Tax (AMT) and Ordinary Income

The Alternative Minimum Tax is a parallel tax computation that runs alongside regular income tax. You pay whichever is higher. AMT uses its own set of rules to compute income — adding back certain deductions and preferences that are allowed under regular tax but disallowed under AMT — and applies its own rates: 26% on AMT income up to $232,600 and 28% above that (2026), after an AMT exemption of $137,000 (single) or $126,500 (MFJ), with phase-outs beginning at $1,306,900 (single) and $1,743,900 (MFJ).

For most FAANG employees, AMT is not the dominant tax — their regular tax at 37% federal rate exceeds what AMT would compute. But AMT becomes relevant in two specific situations:

ISO exercises: When you exercise Incentive Stock Options, the spread between exercise price and fair market value is an AMT preference item — added to AMT income even though it is not regular taxable income. A large ISO exercise can trigger significant AMT in the exercise year, sometimes generating a six-figure AMT bill on unrealized stock appreciation. For FAANG employees who received ISOs at a pre-IPO company before moving to a public company role, this remains a real planning consideration.

Large itemized deductions: State and local tax deductions, miscellaneous itemized deductions, and other items are disallowed under AMT. For California residents with very high state income tax deductions, these addbacks can sometimes push AMT above regular tax — though the SALT cap has reduced this effect for most filers in recent years.

Ordinary Income Tax and Equity Compensation: The W-2 Buildup

A distinguishing feature of FAANG compensation is the sheer volume of income that flows through the W-2 each year. For a senior engineer at the L5–L7 level, the W-2 often reflects:

• Base salary: $200,000–$400,000
• RSU vest income: $150,000–$600,000 or more depending on grant size and stock appreciation
• Annual performance bonus: $30,000–$150,000
• ESPP ordinary income: $10,000–$50,000

Total W-2 income of $400,000–$1,200,000 is common at senior levels. At those income levels, the combined federal (37%), California (12.3%–13.3%), and Medicare (2.35%) marginal rates produce an effective rate on each incremental dollar of new compensation above the high-income thresholds of approximately 52%–53%. For a Washington-based equivalent, the absence of state income tax reduces the combined marginal rate to approximately 39%–40%.

This rate structure makes pre-tax income reduction strategies exceptionally valuable. A California FAANG employee in the top combined bracket who maximizes their 401(k) contribution ($23,500 in 2026) saves approximately $11,855 in income taxes. If they also contribute the maximum to an HSA ($8,550 family coverage), they save an additional $4,300. Deductible charitable contributions save at the same 50%+ combined rate. Each dollar diverted from ordinary income through legitimate pre-tax channels produces roughly $0.50–$0.53 in combined tax savings.

Roth vs. Traditional 401(k): The Ordinary Income Tax Timing Decision

One of the most consequential ordinary income tax decisions for FAANG employees is whether to contribute to a traditional (pre-tax) or Roth (after-tax) 401(k). This decision is fundamentally a bet on the relationship between your current ordinary income tax rate and your future tax rate in retirement.

Traditional 401(k) argument: If you are currently at the 37% federal rate and expect to be at a lower rate in retirement (say, 22%–24%), deferring income now and paying tax at the lower future rate saves a meaningful amount. A $23,500 traditional contribution at 37% saves $8,695 today. If that deferred income is eventually taxed at 24% in retirement, the effective rate on the deferral is 24% rather than 37% — a 13-percentage-point saving.

Roth 401(k) argument: If you expect to be in the same or higher bracket in retirement — particularly if you have a large traditional 401(k) balance growing to generate significant future Required Minimum Distributions, plus Social Security, plus taxable account income — the Roth 401(k) locks in today's rate and eliminates tax on all future growth. For FAANG employees with 20–30 years of compounding ahead of them, Roth 401(k) contributions that compound for decades can produce substantially more after-tax wealth than traditional contributions taxed at retirement, even at the same rate.

The practical answer for most senior FAANG employees: maximize traditional 401(k) contributions first (the tax saving at 37% marginal rate is exceptionally high), then maximize Roth IRA via the backdoor Roth strategy ($7,000 per person in 2026), then consider Roth 401(k) or after-tax mega backdoor contributions for additional tax-advantaged space. The goal is to build a tax-diversified retirement portfolio — some traditional, some Roth, some taxable — that allows flexible income management in retirement.

Charitable Deductions: Ordinary Income Reduction With Philanthropic Benefits

Charitable contributions are one of the few itemized deductions that are not subject to the SALT cap and that can produce material ordinary income reduction for high-income tech workers.

Cash contributions to qualified charities are deductible up to 60% of AGI. Contributions of appreciated stock — directly to a public charity or to a Donor-Advised Fund — are deductible at the full fair market value of the contributed stock, up to 30% of AGI, and no capital gains tax is owed on the contributed appreciation. The deduction is worth 37% in federal tax savings plus state income tax savings at the marginal rate — for a California resident at 37% federal and 13.3% California, a $50,000 charitable deduction saves approximately $25,150 in combined income taxes.

A Donor-Advised Fund (DAF) allows a California FAANG employee to contribute a large block of appreciated RSU shares in one year — capturing the full itemized deduction in that year — and then distribute the proceeds to specific charities over multiple years. This is particularly useful in high-income years when RSU vests, a bonus, and salary together push income toward the 13.3% California bracket: concentrating a multi-year charitable budget into one high-income year maximizes the value of the deduction.

Managing Ordinary Income Across State Lines: Remote Work and Sourcing Rules

For FAANG employees who work remotely for a California-headquartered company while living in another state, or who split time between California and another state, state income tax sourcing rules determine how much of their ordinary income California can tax.

California taxes income earned for services performed in California. If a Google employee is a California resident, all their income — regardless of where they work in a given year — is California income. If they move to Texas mid-year and establish Texas domicile, California taxes the income earned through the date of the move as California income, and subsequent income is no longer California income.

The complication for RSUs: California requires the RSU income at vest to be allocated between California and non-California sources based on the ratio of days worked in California during the RSU vesting period. If a Google employee was granted RSUs in 2021 while a California resident, moved to Texas in 2023, and has those RSUs vest in 2025 — California will claim a portion of the vest income equal to the fraction of the vesting period during which the employee was working in California. This allocation claim persists even after the employee establishes domicile in another state and can result in California tax filings and tax obligations for years after an apparent relocation.

California's Franchise Tax Board aggressively audits these allocations. For a FAANG employee relocating from California with large unvested RSU grants, understanding and documenting the exact allocation methodology is important before assuming the post-move RSU income is entirely non-California.

Ordinary Income Planning: An Annual Checklist for FAANG Employees

Given the volume and complexity of ordinary income events in a typical FAANG compensation package, a structured annual review should cover the following:

• Project total W-2 income for the year: Sum salary, vesting RSU schedule (shares × current stock price as a proxy), expected bonus, and ESPP ordinary income. This is your estimated ordinary income before deductions.
• Maximize pre-tax 401(k) contribution: $23,500 employee limit in 2026 ($31,000 if age 50+). This is the highest-value ordinary income deduction available to most employees.
• Contribute to HSA if eligible: $4,300 individual or $8,550 family in 2026. Triple tax advantage at the federal level; partially offset by California's non-conformity.
• Execute Backdoor Roth IRA: $7,000 per person per year in 2026. Not a deduction from ordinary income, but builds tax-free wealth outside the 401(k) limit. Watch the pro-rata rule if you have any pre-tax IRA balance.
• Evaluate mega backdoor Roth: If your employer's 401(k) plan allows after-tax contributions and in-service rollovers, contribute after-tax dollars up to the $70,000 total 415(c) limit and immediately convert to Roth. No ordinary income deduction, but eliminates future ordinary income tax on the growth.
• Model estimated tax payments: If RSU withholding is at 37% but your effective marginal rate in California is 52%+, calculate the quarterly shortfall and make supplemental estimated payments by each quarterly deadline.
• Review itemized vs. standard deduction: If you have significant mortgage interest plus SALT-capped $40,000 plus charitable contributions, itemizing may produce a larger deduction than the $32,200 MFJ standard. Model both before filing.
• Evaluate charitable contributions in high-income years: If a large vest, bonus, and salary together create an unusually high-income year, concentrating multiple years of planned charitable giving into that year maximizes the value of the deduction.
• Check dependent care FSA eligibility: If you have eligible children under 13, a Dependent Care FSA allows up to $5,000 per household to be excluded from ordinary income for qualifying child care expenses.
• Review any self-employment income: If you have Schedule C income from consulting, advisory work, or side projects, evaluate whether a Solo 401(k) or SEP-IRA is established and funded to maximize the deduction for that income.