RSU taxes: Calculations, reporting, strategies

Technology and startup companies often include restricted stock units (RSUs) as part of their compensation packages. They provide employees with a stake in the company’s success.

While these stock awards are a welcome addition to anyone’s compensation, many RSU recipients are surprised to learn how much they have to pay in taxes when they vest.

Don’t let that be you. Here’s everything you need to know about taxes and RSUs.

What are restricted stock units (RSUs), and how do they work?

Companies offer RSUs as a form of equity compensation to incentivize and acknowledge employees’ contributions to the company’s performance. 

They give employees the right to receive company stock after fulfilling certain conditions, such as staying with the company for a certain number of months or years or achieving specific performance goals.

A restricted stock unit has no tangible value until it vests, which means the employee does not own the actual shares at the time of the grant.

The value of these RSUs is tied to the company’s stock performance, meaning they increase in value as the company’s stock price rises.

Upon vesting, RSUs convert into regular shares that employees can sell or retain. However, if the employee leaves the company before the RSUs vest, they are forfeited and have no value.

RSUs vs. stock options

While RSUs and stock options are both forms of equity compensation, they differ significantly.

RSUs represent a commitment by a company to distribute shares of stock or the cash equivalent to an employee upon vesting. 

Stock options grant employees the right to purchase the company’s stock at a predetermined price. 

This means that RSUs provide immediate value upon vesting without the need for any additional purchase, unlike stock options, which require employees to exercise the options and purchase the stock.

In addition, RSUs are less risky for employees because they retain value unless the stock price drops to zero. In contrast, stock options can expire worthless if the stock price does not exceed the exercise price.

RSU taxation 

Key points to keep in mind:

• RSUs are considered taxable income at the time they vest, not when they are granted.
• Vested RSUs are subject to federal income tax.
• They may also be subject to state income tax, if applicable.
• Tax rates can be as high as 37% for federal income tax and vary among states for state income tax.

When are RSUs taxed?

Upon vesting, RSU recipients must pay ordinary income tax on the total value of their shares. If the shares are sold after they vest, any profit may be subject to capital gains tax in addition to the income tax already paid.

If you sell your vested RSUs immediately upon vesting, you are taxed on the fair market value (FMV) of the stock on the vesting day.

Taxing vested vs. unvested RSUs

Unvested RSUs are not considered taxable income and do not trigger any tax liability. This means that you will not pay any taxes on RSUs until they vest.

Upon vesting, RSUs become taxable, triggering federal, state, and payroll taxes based on their current fair market value.

Calculating taxable income from RSUs

The fair market value (FMV) is the trading price of your company’s stock on the open market on the day your RSUs vest. FMV plays a vital role in determining the value of your vested units and, in turn, the amount of taxes you will owe.

To calculate the taxable income from vested RSUs, simply multiply the number of vested shares by the stock’s fair market value.

For example, say 50 RSUs vest on April 1st with a fair market value of $100 per share. In this case, you made an extra $5,000 of income (50 RSUs x $100) for the year. So, if your base salary is $95,000, your extra $5,000 of vested RSUs will push you into the six-figure club.

Reporting RSU income on your taxes

When you file your tax return, you will report RSU income on IRS Form W-2 in the “Taxable Compensation” section.

This form, which you get from your employer, lists all your annual income, including wages, tips, and other compensation. It also includes the value of any vested RSUs, which is considered part of your taxable wages for the year.

RSU income on Form W-2

Box 1 of your Form W-2, which records your total annual wages, reports the value of your vested RSUs. This box includes not only your regular wages but also the FMV of your vested RSUs. As such, it’s important to ensure the information in this box is accurate and includes all your RSU income.

Reporting capital gains or losses from RSUs

The decision to sell your RSU shares post-vesting requires reporting any capital gains or losses on your tax return. To do this, you need to:

1. Calculate the difference between the FMV at the time of vesting and the sale price of the shares.
   1. If you sell the shares for more than the FMV at vesting, you have a capital gain.
   2. If you sell them for less, you have a capital loss.
2. Report this gain or loss on Schedule D and Form 8949 of your tax return.

Strategies for managing RSU taxes

Several strategies can be used to efficiently manage your RSU taxes to potentially reduce your overall tax liability and improve financial outcomes. These strategies include:

• Selling RSUs upon vesting
• Holding onto RSUs for long-term capital gains
• Donating RSUs to charity
• Adjusting tax withholdings with Human Resources (HR)

Selling RSUs upon vesting

This strategy minimizes the risk of the stock price falling before you have a chance to sell your shares. It also ensures that you will not owe any additional capital gains taxes, as the sale price will be the same as the FMV at the time of vesting.

Holding onto RSUs long-term 

Another strategy is holding onto your RSUs for more than a year after vesting. If you keep your stock for more than a year, any future realized gains (you have to sell a stock to realize a gain) will be taxed as long-term capital gains, which are generally taxed at a lower rate than short-term capital gains. This strategy can be effective if you believe the company’s stock price will increase over time.

Donating RSUs to charity

Donating your vested RSUs to a charitable organization can provide you with a tax deduction at the fair market value of the RSUs at the time of the donation. 

Related: Unlocking the potential benefits of donor-advised funds in 2023: Tax deductions, comparisons, and more

Adjusting tax withholdings

You can manage your RSU taxes by adjusting your tax withholdings with your HR or benefits department. This involves having additional taxes withheld from your paycheck to cover the tax liability from your vested RSUs.

This strategy can help you pay estimated tax payments throughout the year by withholding enough to cover your total tax liability and avoid underpayment penalties.

International RSU tax considerations

Tax laws vary significantly across different countries, and the taxation of RSUs for non-US employees or US employees working abroad can differ greatly from the standard US taxation rules.

RSU taxes for non-US employees

The taxation of RSUs for non-US employees is determined by the tax laws of their country of residence. Each country has specific rules and tax rates that can affect how RSUs are taxed.

In some cases, the tax treatment may be more favorable than in the US, while it may be less so in others. It’s important for non-US employees to understand their home country’s tax rules and to seek professional tax advice if necessary.

Tax treaties and their impact on RSU taxation

Tax treaties are bilateral agreements that outline tax obligations for individuals and businesses with dual residency or citizenship. These treaties can directly affect the taxation of RSUs by determining which country has the right to tax the income and at what point.

Tax treaties can sometimes help individuals avoid being taxed twice on the same RSU income.

Reporting foreign income from RSUs

If you earn income from RSUs in a foreign country, you’ll typically need to report this income on your US tax return, which often results in a withholding tax being applied to that income. 

Since international tax laws can be challenging, it’s a good idea to seek the advice of a tax advisor familiar with them to ensure you’re correctly reporting and paying tax on your foreign RSU income.

Common RSU tax misconceptions

Despite the growing popularity of RSUs as a form of employee compensation, there are several misconceptions about how they’re taxed. These misconceptions can cause confusion and result in errors in managing RSU taxation.

Here are some of the more common RSU tax misconceptions.

Are RSUs taxed twice?

They could be, but not all at once.

RSUs may have two separate taxable events–once at vesting and another if sold. However, this doesn’t qualify as double taxation. 

Double taxation happens when a single source of income is taxed twice, which sometimes occurs with stock dividend income.

Is the cost basis for RSUs and stock options the same?

• The cost basis for RSUs is typically the fair market value of the shares when they vest. 
• The cost basis for stock options is usually the exercise price plus any brokerage fees or commissions.

Do RSUs affect Social Security and Medicare taxes?

Aside from ordinary income tax, vested RSUs are also subject to Social Security and Medicare taxes. 

For 2024, the Social Security tax rate is 6.2% up to the wage base limit of $168,600. The Medicare tax rate is 1.45% with no income limit.

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