Key Tax Decisions on RSUs Upon Vesting

Chris Reddick |

Texas has become an up-and-coming state for tech workers since many companies are moving their headquarters from higher-cost states like California to low-cost states like Texas. Austin is particularly attractive for tech workers since it has a favorable climate and lower living costs than Silicone Valley. RSUs are a common method for attracting and retaining tech workers, but they have tax implications that you should be aware of.

When Restricted Stock Units or RSUs are granted to you at vesting, you have various taxes that you need to pay. Federal income taxes, state income taxes (if applicable), and payroll taxes (Social Security and Medicare). You pay Social Security up to the cap of 6.2%, and Medicare is unlimited at 1.45%. You may also pay state income taxes if your state has an income tax. Texas does not have a state income tax which can be particularly attractive for tech companies that offer RSUs to their employees.

RSUs withhold taxes at the supplemental rate of 22%, usually less than your regular withholding. The tax is generally paid by share surrender at vesting. Therefore, you must pay income taxes immediately upon vesting, and the remaining shares will be placed into your brokerage account. But you might have to pay additional taxes if you did not withhold enough at your marginal tax rate when filing your income tax return.

A common issue with RSUs is that you see withholding of taxes when they vest, but when you file your taxes, you notice that the company may not withhold enough. So essentially, you get a tax surprise when you file your taxes and end up owning money to the IRS and perhaps underpayment penalties. Therefore, with RSUs, you need to decide about withholding taxes and whether you would like to withhold more than your company withheld at vesting. This is typically a wise move.

At vesting, it might be good to estimate your taxes to figure out if you should increase your withholding on your W-4 at work or pay estimated taxes to the IRS. Various calculators can be found online, or you can work with financial planner or CPA to determine the correct withholding amount. However, withholding is not an exact science since many factors must be considered, such as being married and filing jointly or filing single, being head of household, the number of children you have, and overall income. All of these complications make estimating withholding very challenging. So I advise setting aside an emergency fund so that when you file your taxes, you have the money needed to pay the taxes due.

That being said, RSUs are not complicated. Look at them as compensation in the form of company stock. This is no different than getting a bonus for reaching performance goals at your company. But they can be complicated with the tax impacts since the price at grant and when they are vested is different because they are traded on public exchanges. This makes it more complicated to figure out the income you will get and the taxes owned. This is why it is essential to get outside advice to learn more about RSUs and taxes and plan accordingly. Contact me on the contact page below to learn how RSUs fit your financial goals.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in estate planning should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

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