Executive Summary
Does equity vest during maternity or parental leave?
Most companies do not pause vesting during parental leave. Over 90% of companies continue full vesting for statutory or paid leave, and 83% do not adjust vesting for unpaid leave. RSUs and stock options that vest during your leave are taxed the same as if you were working—ordinary income at vesting for RSUs, with standard withholding. However, reduced salary during leave can mean your overall withholding is insufficient, leading to an unexpected tax bill at year-end.
Becoming a new parent is a major life transition—and it intersects with equity compensation in important ways. Vesting during leave, reduced income, and tax withholding can create surprises. Most companies do not pause vesting during parental leave, which is good for continuity—but it means you may owe tax on RSU vesting even when your salary is reduced or zero.
The bottom line: RSUs that vest during parental leave are taxed as ordinary income. Your employer withholds at the supplemental rate (typically 22% federal) on the vesting. If you're normally in the 32% or 35% bracket, that's a shortfall. With reduced salary during leave, your total withholding may be even lower. Make estimated tax payments (Form 1040-ES) or increase withholding on other income to avoid underpayment penalties. See our RSU Withholding guide for details.1
Critical Warning: Underpayment penalties apply if you don't pay at least 90% of current-year tax or 110% of prior-year tax through withholding and estimated payments. A large RSU vesting during leave with insufficient withholding can trigger penalties. Plan ahead.
Vesting During Parental Leave
Do Companies Pause Vesting?
| Leave Type | % Companies That Do NOT Pause Vesting |
|---|---|
| Statutory/paid leave | 90%+ |
| Unpaid leave | 83% |
Source: NASPP Survey
Why most don't pause: Pausing vesting during leave disproportionately affects women (who take more and longer leaves) and can discourage men from taking leave. Continuing vesting supports gender equity and simplifies administration.
Action: Check your company's leave policy. If vesting continues, you'll have taxable income during leave—plan for it.
Tax Withholding During Leave
Why might I owe more tax if RSUs vest during parental leave?
RSU vesting is taxed as ordinary income with supplemental withholding (typically 22% federal). If you're in the 32% or 35% bracket, 22% is insufficient—you have a shortfall. During parental leave, your salary may be reduced or zero, so your total withholding for the year drops. When RSUs vest, the 22% withholding on the vesting may not cover your full tax liability. Result: unexpected tax bill and possible underpayment penalties at year-end.
The Withholding Shortfall
| Scenario | Salary | RSU Vesting | Withholding on Vesting | Your Bracket | Shortfall |
|---|---|---|---|---|---|
| Normal year | $200,000 | $50,000 | 22% = $11,000 | 32% | $5,000 |
| Leave year | $100,000 (reduced) | $50,000 | 22% = $11,000 | 32% | $5,000 + less salary withholding |
Key point: The 22% supplemental rate is a flat rate that often doesn't match your marginal bracket. For high earners, the shortfall can be significant. See our RSU Withholding guide.
Solutions
| Strategy | How It Works |
|---|---|
| Estimated tax payments | Form 1040-ES; pay quarterly to cover shortfall |
| Increase W-4 withholding | Add extra withholding on spouse's income (if applicable) |
| Sell-to-cover | Sell shares at vesting to cover taxes (reduces shares kept) |
| Safe harbor | Pay 110% of prior-year tax to avoid penalties |
Source: IRS Publication 505
Tax Planning for New Parents
Dependent Care FSA
If both parents work (or one is a student), you can contribute to a Dependent Care FSA (up to $5,000 per household in 2025) for childcare expenses. This reduces taxable income. Plan contributions before the year starts—many plans require enrollment during open enrollment.
529 Plans
529 education savings plans offer tax-free growth for qualified education expenses. Some states offer tax deductions for contributions. Starting a 529 when your child is born gives maximum time for growth. Consider funding with equity sale proceeds if you have liquidity.
Child Tax Credit
The Child Tax Credit ($2,000 per qualifying child in 2025, partially refundable) can reduce your tax. Phase-out begins at $200,000 MAGI (MFJ) or $100,000 (single). If your income drops during leave, you may qualify when you wouldn't in a normal year.
Adjust Withholding After Leave
When you return to work, review your W-4. If you had a shortfall during leave, you may want to increase withholding for the rest of the year to catch up.
Stock Options During Leave
ISO and NSO Exercise
If you have stock options and are on leave, you can still exercise (subject to your plan's rules). Consider:
- ISO exercise — Triggers AMT on bargain element. If your income is lower during leave, you may have more AMT headroom. See our AMT Planning guide.
- NSO exercise — Triggers ordinary income. Lower income during leave could mean a lower marginal rate on the spread.
- Expiration — Options typically expire 90 days after leaving the company. If your leave is structured as a leave of absence (not termination), expiration may not apply—check your plan.
Frequently Asked Questions
Q1: Can my company pause my vesting during parental leave?
Answer: Companies can choose to pause vesting, but most don't. Over 90% continue vesting for paid/statutory leave. If your company does pause, the unvested portion may be lost or delayed depending on plan terms. Check your equity plan and leave policy.
Source: NASPP
Q2: Do I need to make estimated tax payments if I'm on leave?
Answer: If your withholding (from salary, RSU vesting, etc.) will be less than 90% of your current-year tax or 110% of prior-year tax, you should make estimated payments to avoid underpayment penalties. Use Form 1040-ES. Pay by the quarterly deadlines (April 15, June 15, Sept 15, Jan 15).
Source: IRS Publication 505
Q3: What if I have no salary during leave but RSUs vest?
Answer: RSU vesting is taxable income. Your employer will withhold on the vesting (typically 22% federal + state). If that's insufficient for your total tax liability, you'll owe more at year-end. Make estimated payments or increase withholding on other income (e.g., spouse's paycheck) to cover the shortfall.
Source: Bright Advisers
Q4: Can I use the safe harbor to avoid estimated payments?
Answer: Yes. If you pay 110% of your prior-year tax (100% if AGI under $150,000) through withholding and estimated payments, you generally avoid underpayment penalties even if you owe at year-end. This can be useful if your income is unpredictable during leave.
Source: IRS Publication 505
Q5: Does paternity leave affect vesting the same as maternity leave?
Answer: In most companies, yes. Parental leave policies typically treat maternity and paternity leave the same for vesting purposes. Both continue vesting in the vast majority of plans. Check your company's policy.
Source: NASPP
Action Checklist
- Check vesting policy — Does your company pause vesting during leave?
- Model tax liability — Estimate tax on RSU vesting during leave
- Set up estimated payments — Form 1040-ES if withholding will be insufficient
- Consider Dependent Care FSA — Enroll during open enrollment
- Review W-4 — Adjust after leave if needed
- Plan option exercises — Lower income during leave may create AMT opportunity (ISOs)
Footnotes
Disclaimer: This guide discusses general principles only. Tax and employment policies vary. This content is for educational purposes and does not constitute tax, legal, or financial advice. Consult a qualified tax professional before making decisions. The authors accept no liability for actions taken based on this content.
Primary Sources
| Source | Type | URL |
|---|---|---|
| IRS Publication 505 | Publication | irs.gov/publications/p505 |
| NASPP: Vesting During Leave | Industry | naspp.com |
| RSU Withholding Guide | Internal | VestingStrategy |
| AMT Planning | Internal | VestingStrategy |
Last Updated: March 2026 | Research Team: VestingStrategy
Footnotes
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NASPP survey data on vesting during leave. IRS Publication 505 covers estimated tax and underpayment penalties. ↩