Key Points:
- RSUs (Restricted Stock Units) are a common form of equity compensation, granting employees the right to company stock after a vesting period.
- RSUs are taxed as ordinary income when they vest, unlike stock options.
- There are strategies to defer taxation and reduce tax liabilities effectively.
- Understand the implications of capital gains tax on RSUs after vesting and when selling them.
What Are RSUs?
Restricted Stock Units (RSUs) are a form of equity compensation provided to employees. Unlike stock options, RSUs represent actual company stock that you will own once they vest. Vesting typically depends on factors like how long you stay with the company or if specific performance goals are met.
RSUs differ from stock options in that there’s no option to buy stock at a set price—you simply receive the shares when they vest. This can create a significant tax liability because you are taxed on the value of the shares once they vest, regardless of whether you sell them or hold onto them.
RSU Taxes Overview
Taxes on RSUs are primarily incurred at two points: when they vest and when they are sold. Here’s a breakdown:
- At Vesting: The fair market value (FMV) of the shares is taxed as ordinary income. This includes federal and state income taxes, Social Security, and Medicare.
- At Sale: Any profit made from selling the shares after they vest is subject to capital gains tax, calculated based on the difference between the sale price and the vesting price.
Tax Strategies for RSUs
Managing your RSU tax liability involves understanding these key concepts:
Section 83(b) Election: This allows you to pay tax on the value of the RSUs at the time of grant rather than when they vest. It can be useful in certain circumstances but requires careful planning.
Sell RSUs Upon Vesting: Selling immediately upon vesting can help you cover your tax liabilities and reduce the risk of holding concentrated stock in your employer.
Defer Taxes with Retirement Accounts: Contribute proceeds to retirement accounts to offset some of your taxable income.
Adjust Withholdings: Work with HR to adjust your withholdings as RSU vesting dates approach to avoid underpayment penalties.
Common Questions
Will RSUs Appear on My W-2?
Yes, the value of your vested RSUs will be reported on your W-2 as part of your taxable compensation. Be sure to check Box 1 for this information.
Do RSUs Have a Cost Basis?
Yes, the cost basis for your RSUs is the FMV at the time of vesting. This is important when calculating capital gains tax upon selling the shares.
Getting Help with RSU Taxes
Navigating the complexities of RSU taxes can be challenging. Consult a financial planner or tax professional to ensure you’re making informed decisions. You don’t want to leave money on the table or face unexpected tax bills.
Stop Wasting Money on Taxes—Get Expert Guidance Today
Your equity compensation should work for you, not against you. Contact Progress Wealth Management to schedule a consultation and ensure your RSUs are managed efficiently.