Restricted stock units (RSUs) have become a popular form of equity-based compensation offered by many employers. But RSUs come with important tax implications at vesting that you need to understand. To help anyone navigating RSUs as part of their employee benefits, we've put together this FAQ covering the key taxation questions around these awards. You'll learn the tax impacts at grant, vesting, and sale, along with reporting requirements, planning strategies, and RSU tax rules. Knowing the tax consequences can help you maximize the value of RSU compensation.
1. When are RSUs taxed?
RSUs are taxed at the time the shares vest and you take possession of them, which is treated as ordinary wage income. The fair market value of the shares on the vesting date determines the taxable value for withholding and income tax purposes.
2. How are RSUs valued for tax purposes?
The fair market value of the company stock on the date the RSUs vest becomes the taxable value that payroll and income taxes are based on. This value is considered ordinary wage income just like regular salaries.
3. What tax rate applies to RSU income?
The RSU income is taxed as ordinary wage income, so whatever marginal federal and applicable state income tax bracket you fall under based on your total taxable income for the year will apply. RSU income is combined with all other ordinary income like salaries to determine the rate.
4. Do I need to make estimated tax payments for RSUs?
Yes, you may need to increase income tax withholding on your regular paychecks or make quarterly estimated payments to avoid underpayment penalties if the RSU income is large enough to create a substantial tax burden when added to your other income sources.
5. Are RSUs subject to Social Security and Medicare taxes?
Yes, RSU income is considered compensation for services, so it is subject to FICA taxes for Social Security and Medicare up to the annual wage base limits just like regular salary and wages. The vesting RSU market value gets combined with other earned income for FICA tax purposes.
6. Can I defer the RSU tax liability?
In some instances you may be able to make an IRC Section 83(b) election within 30 days of the RSU grant to accelerate taxation to the grant date instead of waiting until vesting. But this permanently fixes the value for taxes at grant value rather than vesting value. Consult with a tax professional to see if this election could reduce your total tax burden.
7. How are state taxes handled on RSUs?
The market value of your vesting RSUs is taxable income in the state where you reside and work on the vesting date. Applicable state income taxes will be withheld just like federal income taxes. Your company will handle withholding for your state based on your address and RSU compensation.
8. Do I receive a tax document for RSU vesting?
Yes, your employer will issue you a Form W-2 including the market value of any RSUs that vested as taxable income in Box 1 along with all your other compensation and wage income. The W-2 shows total taxable income and any taxes withheld.
9. What if my RSUs vest after I leave the company?
Any RSUs that vest after your termination of employment are still considered taxable compensation, even though you are no longer working there. Taxes will be withheld at vesting and reported on a Form W-2 just as if you were still employed.
10. Can I do anything to reduce RSU taxes?
Unfortunately the options are limited for reducing taxes on RSU income since it is treated as ordinary wage compensation. Some employees may qualify for investment tax benefits if they sell the shares immediately, hold them over a year before selling, or move to a state with no income tax. Discuss your vesting and sales plans with a tax advisor.
11. Are RSU grants taxable?
No, receiving a grant of RSUs does not trigger any taxable income. The grant is just the right to receive shares in the future if vesting conditions are met. Taxation occurs at vesting based on the stock value at that time.
12. Do I owe taxes if I forfeit unvested RSUs?
No, you will not owe any taxes on unvested RSU shares that are forfeited and never actually vest. Since forfeited RSUs are canceled before vesting, they are not considered taxable income. Only shares that actually vest are taxed.
13. How are cash-settled RSUs taxed?
For RSUs settled in cash instead of shares, the cash payment received upon vesting or settlement is taxed as ordinary wage income just like share-settled RSUs. The amount paid is included in your W-2 wages for the year of settlement and applicable taxes are withheld.
14. Can I transfer vested RSUs to someone else?
No, vested RSUs may not be transferred or assigned to another person. The shares are only delivered to the employee who received the RSU grant. Once the shares are actually issued at vesting, they become property of the employee and can then be sold or transferred like any other shares you might own.
15. Are foreign-taxed RSUs treated differently?
For RSUs subject to foreign country taxes, you may be able to claim a foreign tax credit on your US return to avoid double taxation. Reporting of foreign taxes depends on whether your company reimburses you for such taxes or not.
16. Can RSU income qualify for 401(k) contributions?
Yes, since RSUs are taxed as ordinary wage income, they qualify as eligible compensation for contributing to an employer 401(k) or similar retirement plan up to IRS limits. The vesting value increases your W-2 wages that qualify for pre-tax retirement contributions.
17. What tax rate applies if my income exceeds $1 million?
If the value of your vesting RSUs combined with your other compensation exceeds $1 million for the year, the extra 0.9% Additional Medicare Tax may apply to the amount over $1 million. The higher income could also impact your capital gains rate.
Making Sense Of The RSU Tax Rules
Navigating the tax implications of your employee RSU compensation can be tricky, but proper planning is key to avoiding surprises and penalties at tax time. If you have received RSUs and need guidance on tax withholding, estimated payments, filing requirements, or strategies to minimize your tax burden at vesting, the knowledgeable advisors at United Tax can help. Our tax professionals have extensive experience advising clients on multi-state RSU tax compliance and planning opportunities. Don’t leave potential savings on the table. Contact us today for personalized answers to all your RSU tax questions.
