RSUs, K-1s, and Physician Equity Comp

One under-withholds by design; the other withholds nothing at all

A hospitalist signs on as medical director for a health-tech company and receives restricted stock units worth $90,000 at vest. The same year, her spouse makes partner in an anesthesia group and receives his first Schedule K-1 showing $240,000 of ordinary income. Both are income. Neither behaves like a paycheck. The RSU vest arrives with federal withholding at a flat 22% — $19,800 held back against a bill that, in a 35% bracket, is actually $31,500. The K-1 arrives with nothing withheld at all, and part of it may represent cash the practice never distributed. Physicians increasingly hold both kinds of income at once: equity from telehealth, device, and imaging-AI companies on one side, practice ownership on the other. The two follow different rulebooks — different tax timing, different reporting forms, different penalty exposure — and the default settings of both are calibrated to under-collect from anyone earning attending income. This module walks through both rulebooks, works the sell-versus-hold decision with real 2026 numbers, and names the three surprises that generate most of the damage.

Pass-through income

Business income a partnership or S corporation reports to each owner on Schedule K-1, taxed on the owner's individual return in the year the entity earns it — regardless of whether any cash is distributed.

Start with the RSU. On the vest date, the fair market value of the shares — price times share count — becomes ordinary income under §83(a). It lands in Box 1 of your W-2, and Medicare tax, plus the 0.9% Additional Medicare Tax at attending income, applies. You cannot defer it, elect out of it, or time it; the vesting schedule your employer set is your tax calendar. Your basis in the shares equals the income recognized, so a same-day sale produces almost no additional gain. The K-1 follows the opposite logic. A partnership or S corporation pays no federal income tax itself; its income passes through to owners in proportion to their interests, and you owe tax on your share in the year the entity earns it — whether or not a dollar is distributed. Self-employment treatment varies by entity: a general partner or active LLC member typically owes self-employment tax on ordinary income and guaranteed payments, while S corporation pass-through income is not self-employment income. Practice has varied on active-LLC-member treatment — confirm your entity's position with your CPA.

Why it matters: Pass-through income breaks the link between cash received and tax owed. A practice that retains earnings for equipment or working capital still hands you the tax bill on your full share, and no employer withholds anything against it. Every K-1 dollar therefore arrives with an unfunded federal liability attached, and the funding job — quarterly, under §6654 — is entirely yours.

Selling at vest costs almost nothing; holding is a $90,000 purchase

500 RSUs vest on June 1, 2026 at $180 per share. The employer withholds federal income tax at the flat 22% supplemental rate (Publication 15, 2026), which applies to supplemental wages up to $1,000,000 in a calendar year.

Bottom line: The $31,500 income-tax bill was fixed the moment the shares vested, selling immediately adds roughly nothing to it, and every share you keep is a fresh decision to hold $180 of your net worth in the company that also signs your paycheck.

Three ways this pair of forms ambushes an attending in April

Three failure modes account for most of the damage. First, the vest shortfall: the flat 22% supplemental withholding runs 13 points below a 35% bracket, so a physician with $150,000 of annual vests silently accrues roughly a $19,500 gap while every pay stub looks fully withheld. Second, the silent K-1: no entity withholds a dollar against pass-through income, and §6654 assesses the underpayment penalty quarterly at the federal underpayment rate — the April balance is the visible cost, the penalty is the invisible one, and both were avoidable in June. Third, the calendar: partnerships routinely issue K-1s in late summer under their own extensions, which forces your personal return onto extension. An extension moves the filing deadline, not the payment deadline — the tax you project as due must still be paid by April 15 to stop interest.

How to avoid it: Recompute every vest at your marginal rate, not the 22% withheld, and bank the difference the week the shares vest. Set quarterly estimates against your §6654 safe harbor — 110% of prior-year total tax at attending income — starting when the first K-1 dollar is earned, not when the form arrives. Expect the K-1 late: plan on an extension, and pay your projected balance by April 15, because an extension moves paperwork, not payment.

Check yourself: cash received is not the taxable number

The single most common K-1 misreading is treating the cash that reached your checking account as the income you owe tax on. Run this one before looking at the choices.

Your practice K-1 (Form 1065) reports $60,000 of ordinary business income in Box 1. The group distributed only $35,000 of cash to you during the year, retaining the rest for an equipment purchase. How much of the partnership income is included in your taxable income this year?

1. $0 until you withdraw the retained earnings
2. $25,000 — the retained portion — when the equipment is later sold
3. $35,000, the cash actually distributed to you
4. $60,000, your full distributive share — the answer

Pass-through taxation follows the entity's income, not its distributions. Your full $60,000 distributive share is taxable in the year the partnership earns it under §702, and the $35,000 of cash affects only your basis, not your income. The reverse also holds: a later distribution of previously taxed earnings is generally not taxed again. Plan estimated payments on the K-1 income figure, never on what reached your checking account.

The rulebook in four lines

• RSU vesting is ordinary income at vest-date fair market value, reported on your W-2, whether or not you sell a single share.
• The flat 22% supplemental withholding rate sits well below a typical attending marginal rate, so every vest quietly builds an April balance due.
• K-1 income is taxable in the year the entity earns it, distributed or not, and arrives with zero withholding — the estimated-tax duty under §6654 is yours alone.
• Holding vested shares is a fresh concentrated-stock purchase decision, not a tax-avoidance move, because the vest-year tax is already fixed.
• A late K-1 can force your return onto extension, but the extension moves the filing deadline only — projected tax is still due April 15.

Do this next: Pull your most recent RSU vest statement, compute (vest income × your marginal rate) minus the 22% actually withheld, and move that difference into a dedicated tax set-aside account this week.