How Restricted Stock Units Affect Your Taxes

 

Some companies offer their employees restricted stock units (RSUs) in addition to their typical salary. But how do restricted stock units affect your taxes?

In today’s post, I’ll explain everything you need to know about RSUs and your taxes.

What are restricted stock units (RSUs)?

First of all, let’s make sure we’re on the same page about what RSUs actually are. Imagine you’re a hardworking employee at a company that appreciates your efforts. Rather than just giving you a pat on the back or a free lunch, they give you RSUs. These RSUs are actually promises that you will receive company stock in the future.

However, there’s a difference between RSUs and just receiving stock as compensation. The difference is that these stocks are “restricted.” This restricted aspect means that you don’t receive the RSUs until you meet certain requirements.

Typically, these restrictions or requirements are tied to time or performance. In other words, you may need to stay with the company for a specified number of years or meet certain performance milestones before you can claim your shares in the company.

What is a vesting period?

The time period between when you’re hired and when you’ve met the requirements needed to acquire your restricted stock units is known as a “vesting period,” “holding period,” or “vesting schedule.”

Usually companies will set restrictions or a vesting schedule that spans several years. For instance, if you’re granted 100 RSUs, your vesting schedule might dictate that you receive 25 shares each year for four years.

When do I owe taxes on restricted stock units?

When it comes to RSUs, you’ll be taxed at two different times: when your shares are vested and when you have capital gains from selling your shares.

How are my restricted stock units taxed when they are vested?

RSUs are not taxed until after they are vested. Once they vest (you’ve met the requirements to receive them), they are considered income. And where there’s income, there’s taxes.

The IRS tax rate that will apply to your RSU income is 22% for income up to $1 million and 37% for income over $1 million. Keep in mind that your tax liability may be even higher than that once you take into account the taxes you owe for your total taxable income for the year.

Luckily, most companies withhold a portion of your RSUs to cover the federal, state, and local taxes that you owe on those stocks. This is similar to how your company withholds taxes from your regular paycheck.

For RSUs, this process is often called “sell to cover” withholding because the company sells a portion of your RSUs to cover your tax liability on your vested shares. Because of this, you may see fewer shares in your account.

Important: Even if your company employs a sell to cover withholding, if the stock has a great year, you may end up owing more than they withheld. If this happens, work with an accountant to discuss options for altering your sell to cover amount or other tax withholdings so you’re not stuck with a surprise tax bill.

Your company may also give you the option of paying your tax liability on your own so that you can keep all of your vested shares. Or, you may also choose to sell all of your vested shares and use the profit to pay your tax liability. Just remember that any capital gains on shares that you sell will also be taxed (more about this next).

How are my restricted stock units taxed when they are sold?

After your RSUs are vested and you’ve paid tax on the income from those shares, they become yours to keep or sell. This is where capital gains tax comes into play.

If you hold the shares and they appreciate in value, you’ll owe capital gains tax when you sell. The rate depends on how long you hold the shares:

  • Short-Term Capital Gains: If you sell within a year, your profit or gain is taxed as ordinary income.
  • Long-Term Capital Gains: If you sell after a year, your profit or gain is taxed at a lower rate.

How is the gain on the sale of my restricted stock units calculated for tax purposes?

Your capital gain is the difference between the selling price and the fair market value when your shares were vested. For instance, if your shares were worth $50 each at vesting and you later sell them for $75 each, your gain would be $25 per share.

How do I know how much RSU income I had and how much my company withheld?

You can use your Form W-2 to find out how much RSU income you received. Look at Box 14 “Other” to see the dollar amount, which will typically be accompanied by the acronym “RSU.”

It’s a little tricker to find out how much your company may have withheld/sold to cover your income tax liability because that amount will be combined with your regular withholding amounts in boxes 2, 4, 6, and 15 of your Form W-2. You’ll likely need to contact your company’s finance or HR department for detailed amounts.

What tax and financial tips do you have for restricted stock units?

There are a few tax strategies and finance tips you should keep in mind when it comes to your RSUs:

  • Plan for Taxes: Knowing the tax implications and how your company handles sell to cover withholdings can allow you to properly set aside money (if necessary) to cover income tax liabilities. You can also plan ahead on the selling end by holding your shares longer than a year to avoid paying a higher capital gains tax rate.
  • Diversify: Don’t be afraid to sell your shares. Selling shares after they vest can help you diversify your investment portfolio, which is always a good plan.
  • Stay Informed: Keep an eye on your company’s stock performance and overall financial health when deciding the best time to sell shares. Work with a certified public accountant or financial planner to ensure that you’re making wise financial choices.

Abridged by Amy

RSUs can be an attractive part of any compensation package, but they offer both opportunities and challenges. By understanding how RSUs are taxed, you can make smart decisions that align with your financial goals now and in the future.

Should My Business Be an LLC or an S-Corporation?

What Is a Registered Agent?

 
Amy Northard, CPA

Amy Northard, CPA

Founder of The Accountant for Creatives®
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

Are things like taxes & bookkeeping getting in the way of your creative time? Let's Chat!
Bookkeeping & Tax Tips
Sign up for free tax tips and advice sent straight to your inbox!
By clicking on the submit button, you agree with our Privacy and Terms Policy.