Strategies For Tech Workers to Manage Taxes on RSUs
Restricted Stock Units or RSUs are a way for tech companies to reward their valued employees. RSUs are an excellent way for tech companies to get loyalty from their employees since they are on a vesting schedule.
RSUs have a vesting schedule, and you get taxed when they are vested. Therefore, as a result of getting, through vesting, your RSUs, you will get taxed on them since they are yours now. The taxes that gets withheld are federal and state income taxes and payroll taxes (Social Security and Medicare).
The taxation of RSUs is done with what the IRS calls supplemental withholding. This means that you will get a withholding of income taxes on RSUs of 22% for under a million in RSUs vested, and 1 million and over is taxed at the highest tax rate of 37% in 2022. So, view RSUs as being taxed like a bonus with your regular income taxes and payroll taxes.
Two strategies to help manage taxes on RSUs are the following.
1) Managing Capital Gains Taxes: There are no tax implications before the RSUs vest. As mentioned, the tax implications occur when they are vested. So the strategy is what to do with the RSUs when they vest. Any gains are taxed at short-term capital gains rates if you hold the RSUs for less than one year.
If possible, keep the RSUs after they vest for at least one year and one day (yes you need the one day!). You can get a more favorable tax rate for long-term capital gains if you hold them for more than a year.
But another strategy is to sell the RSUs immediately upon vesting and diversify them into a low-cost ETF portfolio. You already paid the taxes on the RSUs, so this can also be a tax-efficient strategy.
In summary, the two most commonly used strategies are holding for over one year or selling immediately and diversifying upon vesting. Talk to a financial planner to see what is suitable for your circumstances.
2) Adjusting Your Withholding: With RSUs, withholding is done when you first fill out your W-4 when you started your job. This form (which most people don't remember) is used to indicate if you are filing single or married filing jointly, and so forth. Your employer uses this to determine how much taxes to withhold from your paycheck.
In many cases with RSUs, there is not enough withholding, and you might get unpleasantly surprised when you file your taxes that you own much more than you thought. This sometimes happens when your employer withholds 22% (very common), and you get vested a substantial amount of RSUs, possibly pushing you up to the highest income tax bracket of 37%! Yikes!
You will need to pay more taxes the next time you file and maybe estimate quarterly tax payments since you did not pay enough for that tax year. So, make sure you adjust your W-4 and make sure that you are withholding enough each paycheck.
You can adjust your withholding by increasing the amount of money that you withhold per paycheck. For example, you might want to increase it by a specific dollar amount each paycheck, so you don't get a tax surprise. Also, pay your estimated taxes if you are required to. This is another way to increase the amount of taxes withheld to get fewer tax surprises. Reach out to me on the contact page below to learn more about tax-efficient strategies for RSUs.
*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 own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.