Restricted stock units (RSUs) are a type of equity compensation that involves awarding employees the right to own actual shares of a company’s stock. RSUs are commonly granted to founders and initial staff of startup businesses and promise staffers a certain number of shares of company stock that will be granted to them at a future date, when certain company goals are achieved. Because the staffer is only granted the stock in principle, without it being immediately transferred, RSUs are typically not taxed until they are vested, or until the employee has earned the right to the stock.
While they can be of great benefit to staffers, it is important to understand the tax implications to gain a broader understanding of how restricted stock taxation works for those who are beneficiaries of them. Let’s dive into the specifics of RSU taxation to ensure you navigate this form of compensation wisely.
Taxation for RSUs
The tax treatment of RSUs can vary depending on a number of factors, including the type of RSU and the timing of the vesting.
- Upon vesting: your RSUs are subject to the ordinary income tax.
- Should you sell your RSU: you may be liable for capital gains tax.
Typically, one Restricted Stock Unit represents one share of actual stock. These stocks typically become taxable as ordinary income based on the fair market value. Employers withhold taxes, typically around 22%, just like they do for regular paychecks. This withholding ensures compliance with tax regulations.
Vesting and tax impact
A vesting schedule dictates when the shares become unrestricted. This schedule is either time- or performance-based. For example, your company grants you 1,000 RSUs with a 4-year vesting schedule. There is no tax impact on this date, but a 4-year vesting schedule might distribute shares like this:
- Year 1: 250 shares
- Year 2: 250 shares
- Year 3: 250 shares
- Year 4: 250 shares
Remember, if you leave the company before full vesting, you forfeit unvested shares. The taxation occurs on the vesting date, counting as ordinary income.
Vest date
The day your shares vest, they will count as compensation and be taxed as ordinary income. The below will help you understand it better – and continue from the above example
- Year 1: 250 shares at $25/share therefore $6,250 (250 x $25) is taxed as ordinary income.
Tax summary
The date on which the stock is granted has no tax impact, but on the date on which they vest, your shares are taxed as ordinary income.
Employers usually withhold 22% for RSUs (just like they withhold taxes on your paychecks). This means that instead of receiving 250 shares, you may receive 195 shares. Whether your company is withholding enough depends on a few factors, including your tax bracket. It is advisable to consult with your CPA to look at your full income portfolio and advice.
Future tax considerations
After vesting, there’s no tax benefit to holding the shares. You can sell them immediately with minimal or no additional tax impact. However, holding the shares post-vesting will subject you to capital gains tax.
Capital gains tax
If you sell the shares after the vesting date, you’ll face capital gains tax. The vesting date marks the start of your holding period and sets your stock basis.
The capital gains tax rates vary, with a maximum rate of 20% for higher income levels.
The tax rate on most net capital gains is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $41,675 for single and married filing separately, $83,350 for married filing jointly or qualifying surviving spouse, or $55,800 for the head of household.
A capital gain rate of 15% applies if your taxable income is more than $41,675 but less than or equal to $459,750 for single; more than $83,350 but less than or equal to $517,200 for married filing jointly or qualifying surviving spouse; more than $55,800 but less than or equal to $488,500 for the head of household or more than $41,675 but less than or equal to $258,600 for married filing separately.
However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.
There are a few other exceptions where capital gains may be taxed at rates greater than 20%
- The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
- Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
- The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
Special RSU tax considerations
It is important to note that the tax treatment of RSUs can vary between states. Therefore, holders of these types of stock units need to consult with a tax expert who not only understands how to report restricted stocks to the IRS, but who is also versed in multi-state accounting.
If you receive stocks or dividends, it is advisable to keep a record of your income and expenses. This will help to ensure that you make accurate submissions to the IRS. You can also consult with a tax expert to ensure compliance and help you maximize deductions and tax credits that you may be eligible for.
At Fusion, our tax professionals are skilled at submitting accurate and timely tax returns for businesses and individuals. We can look at your entire financial profile to help you establish your tax liability and save you money where possible. Consult with our experts today if you require tax filing assistance.
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.