If you’ve been granted Restricted Stock Units (RSUs) as part of your compensation package, you might be wondering how they’ll affect your taxes. It’s a smart question to ask, because RSUs can have significant tax implications that aren’t always obvious at first glance.
RSUs are a form of equity compensation in which a company promises to give you shares of its stock at a future date. This type of stock-based compensation also comes with unique tax considerations that differ from regular salary or bonuses.
The taxation of RSUs occurs in stages — when they vest (i.e., when you actually receive the shares), and potentially again when you sell those shares. Understanding the details of RSU tax treatment can help you maximize the benefit of your vested shares and minimize the amount of tax you need to pay.
In the following sections, we’ll explore how RSUs are taxed, what you should know about tax withholding and other important factors to consider when managing your RSU-related taxes.
How are RSUs taxed?
Here’s the most important thing you need to know about RSUs: They have a unique tax treatment that sets them apart from other forms of equity compensation. You’ll need to understand the full details to plan for the future.
Unlike stock options, RSUs are taxable when they vest, not when they’re granted or exercised. At the vesting date, the fair market value (FMV) of the shares you receive is considered ordinary income. This means it’s taxed at your regular income tax rate and will appear on your W-2 form.
The FMV is typically based on the closing price of the stock on the vesting date. This value determines both your taxable income and the cost basis for your shares.
RSUs differ from stock options in their tax treatment. With stock options, you generally don’t owe taxes until you exercise the options — but RSUs create a tax liability as soon as they vest, regardless of whether or not you sell the shares.
Here’s the second important thing to know about RSU taxes: If you hold onto your RSU shares after vesting and they appreciate in value, you may owe capital gains tax when you sell. That tax will be either:
- Long-term capital gains: If you hold the shares for more than one year after vesting, any profit is taxed at the preferential long-term capital gains rate.
- Short-term capital gains: If you sell within a year of vesting, your profits are taxed as ordinary income, typically at a higher rate.
It’s crucial to anticipate these tax events. Without proper planning, you could end up with an unexpected tax bill, especially if your RSUs vest in large numbers or if the stock price has increased significantly.
RSUs can affect other aspects of your tax situation. For instance, they might push you into a higher tax bracket or impact your Alternative Minimum Tax (AMT) calculation. In some cases, they could affect your eligibility for certain tax credits or deductions.
RSU taxation is complex, so it’s often worthwhile to consult with a tax professional who can help you develop a strategy tailored to your specific situation. For additional guidance, download our e-book, Equity Compensation Tax Strategies: Quick Start Guide
How taxes are withheld on RSUs
Withholding is also a big part of the RSU tax picture. When your RSUs vest, your employer is required to withhold taxes — the company will treat the fair market value of the vested shares as supplemental wages. This withholding can significantly impact your take-home value and potential tax liability.
Companies are obligated to withhold:
- Federal income tax.
- State income tax (where applicable).
- Social Security and Medicare taxes (FICA).
For supplemental wages under $1 million, companies often use a flat rate of 22% for federal income tax withholding. This rate is set by the IRS for supplemental wages, which includes RSU income.
While 22% withholding might seem substantial, it may not be enough, especially if you’re in a higher tax bracket. Here’s an example:
Let’s say you have RSUs vesting with a fair market value of $100,000 and you’re in the 32% tax bracket. If your company withholds the standard 22% for federal taxes, you’d owe an additional $10,000 in federal taxes ($32,000 – $22,000) when you file your return.
That can pack a wallop during tax season, plus you might end up owing underpayment penalties if you haven’t paid enough throughout the year.
To avoid these issues, consider:
- Adjusting your W-4 to increase withholding on your regular salary.
- Working with your CPA or tax advisor to make estimated tax payments on your RSUs.
- Selling some shares at vesting to cover the additional tax liability.
Expert guidance for RSU taxes
RSUs have complex tax implications that can significantly impact your overall financial picture. From vesting to stock sale, you need to understand the details of RSU taxation so you can keep more of your compensation.
For additional guidance, download our e-book, Equity Compensation Tax Strategies: Quick Start Guide
Or if you need personalized guidance, consider setting up a call with KFA Private Wealth Group.
Our advisors, who are both CPAs and tax experts, can help you understand RSU tax planning so you can meet your financial goals.
Talk to KFA Private Wealth Group to discuss how we can help you manage your RSU-related taxes more effectively.
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