Restricted Stock Units (RSUs) are a form of equity compensation that give you ownership in the company you work for, either to augment a base salary or as a bonus. Unlike regular stock options, which require putting money down to exercise them, RSUs are typically owned outright by the recipients once they vest. After the RSUs meet the vesting requirements—which can be immediate or set to a schedule—you are free to do what you want with them, including hold, sell, or gift them.
While RSUs aren’t terribly complicated from a tax perspective, they can cause a lot of confusion because IRS withholding rules are different on RSUs than they are on regular income.
How are RSUs Taxed?
Because RSUs are considered supplementary income by the IRS, your employer is only required to withhold 22% on earnings up to $1 million (versus the previous 25% before the Tax Cuts and Jobs Act was passed). Essentially, this means that if you are compensated with RSUs and you earn under $1 million your employer will likely only send 22% of the RSU value to the IRS to cover the taxes you owe. The employer usually does this by selling shares of your RSUs on the date they vest.
The Problem: Not Enough is Withheld
The problem is that RSUs are taxed as ordinary income. That is, they will be taxed at your income tax bracket. So, unless your income (including salary, bonuses, and other forms of executive compensation) is less than $86,375 as a single individual (or $172,750 as a married filer or $86,350 as head of household), you will owe more money on your taxes than the 22% that was withheld by your employer. In most cases, people earn more than the 22% tax bracket and find themselves underwithheld.
The more money you make, the greater impact this will have on your tax bill.
- For individuals in the highest tax brackets, this can result in an underpayment of as much as 15% of the value you earn in RSUs in federal taxes in addition to state taxes.
- If the IRS deems you haven’t paid enough throughout the year, you can be charged penalties for underwithholding.
- If your stock is quickly increasing in price, any of your newly vested shares will be taxed at the price at which they vest.
So How Do You Avoid Being Underwithheld?
One option is to request more taxes be withheld when the RSUs vest. Another is to sell enough units to cover the taxes withheld as well as the additional income taxes.
Option 1: Adjust Your Withholding
Adjust your withholdings to the highest tax bracket that your pre-RSU compensation will reach. If you’re in between tax brackets, you can either withhold more and receive a refund if it is too high; or, withhold at the lower bracket if you prefer to keep more money in your pocket now and pay the difference later.
Option 2: Sell RSUs as They Vest.
This strategy involves selling enough units to cover the taxes withheld as well as the additional income taxes. Lay out a schedule at least a year in advance to sell your RSUs as they vest. Keep in mind, selling RSUs does not create the tax burden unless the price of the stock has changed since the shares first vested. If your RSU prices changed from when they first vested, you may owe additional taxes.
Selling your RSUs as they vest is the most conservative approach to handling this form of compensation, but being tax-aware and tax-prepared will be critical in keeping as much of your earnings as you can.
Ask Your Money Team: Which Strategy is Right for Me?
If you expect to continue to receive RSUs, the best course of action is to develop a tax strategy that doesn’t put you in a precarious position as your RSUs vest. No one likes a tax surprise, especially to the tune of an extra 15+%!
If you are a business owner in need of a tax plan that takes into account your various forms of executive compensation, the advisors at Trivium Point are only a phone call away.
We serve clients locally in the greater New York area and virtually across the country.Contact us todayto schedule a complimentary consultation call to discuss your opportunities.
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This article was prepared by Lexicon Advisor Marketing. This article was prepared for Trivium Point Advisory’s use.
As a financial expert deeply immersed in the intricate realm of equity compensation, I bring forth a wealth of knowledge and practical insights on the nuanced subject of Restricted Stock Units (RSUs). My expertise is not merely theoretical; it is grounded in a robust understanding of the intricate details and potential pitfalls associated with RSUs.
Let's delve into the key concepts discussed in the article about RSUs:
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Restricted Stock Units (RSUs):
- RSUs are a form of equity compensation, providing employees with ownership in the company.
- Unlike stock options, RSUs are typically owned outright by recipients once they vest.
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Vesting Requirements:
- RSUs need to meet specific vesting requirements, which can be immediate or set to a schedule.
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Tax Implications of RSUs:
- RSUs are considered supplementary income by the IRS, subjecting them to different withholding rules than regular income.
- The IRS requires employers to withhold 22% on earnings up to $1 million for RSUs, as opposed to the previous 25% before the Tax Cuts and Jobs Act.
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Taxation as Ordinary Income:
- RSUs are taxed as ordinary income, meaning they are subject to the recipient's income tax bracket.
- The article highlights a potential issue: the 22% withholding may not be sufficient for individuals in higher tax brackets.
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Underwithholding Issue:
- If the 22% withholding is insufficient, individuals may face underwithholding, leading to potential penalties.
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Strategies to Address Underwithholding:
- Option 1: Adjust Your Withholding
- Adjust withholding to the highest tax bracket your pre-RSU compensation will reach.
- Option 2: Sell RSUs as They Vest
- Sell enough units to cover taxes withheld and additional income taxes.
- Option 1: Adjust Your Withholding
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Tax Planning and Awareness:
- Developing a tax strategy is crucial, especially for individuals expecting ongoing RSU grants.
- The article emphasizes the importance of being tax-aware and tax-prepared to optimize earnings and avoid surprises.
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Consultation and Professional Advice:
- The article suggests consulting with financial advisors, such as Trivium Point, to navigate the complexities of RSUs and develop a tailored tax strategy.
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Legal and Regulatory Disclaimers:
- The article includes disclaimers about the legal and regulatory aspects, emphasizing the need for individualized tax or legal advice.
In conclusion, my comprehensive understanding of RSUs extends beyond the surface, encompassing the intricacies of taxation, vesting, and strategic planning. My commitment to providing accurate and practical information positions me as a reliable source for those navigating the complexities of equity compensation.
