Unless you’re a tax professional, determining your tax rate can be daunting and trying to figure out your RSU tax rate can seem even more overwhelming. 

The way U.S. tax law works is far from simple and, generally speaking, most people don’t have the patience to learn how taxes work (but not you of course).

Learning the basics of how you’re taxed when it comes to both regular income and to RSUs can be extremely helpful. 

You’ll still need to use tax filing software for your returns and will want to consult a tax professional for more advanced planning, but for the “simple” task of determining your RSU tax rate, this article will teach you how to be accurate enough to get by.

Step #1 - Have a Basic Understanding of How the U.S. Tax System Works

Have you ever heard of someone declining a pay raise because that raise would push them into a higher tax bracket? The practice is more common than you’d think and is based on a terrible misconception of how the U.S. tax system works.

Some people believe that being subject to a higher tax rate means that all the income they’ve made is now subject to a higher rate. A person who believes this may think that declining a raise would save them some money because they’d be paying less in taxes. 

It’s a bold strategy, but unfortunately for them, this is not how the U.S. tax system works.

The tax system in the U.S. is a progressive tax system.

This means that as you earn more money, new dollars earned are taxed at a higher and higher rate. Here’s a chart to illustrate how it works if you were to make $170,050.

As you can see your first $0 to $10,275 are taxed at 10%. Then every dollar above that up to $41,775 is taxed at 12%. After that, every dollar up to $89,075 is taxed at 22%. Then finally, every dollar after up to $170,050 is taxed at 24%.

We stopped here to keep the example simple, but tax rates go all the way up to 37% starting once you make more than $539,900.

Step #2 - Know Your Filing Status

Now that you have a basic understanding of how the tax brackets works, we’re going to add another layer of complexity. This has to do with your filing status.

There are technically 5 types of filing statuses, but we’re going to focus on the two most common - Single and Married Filing Jointly. 

Your filing status will affect how large or small the ranges (previously described) will be. If you’re single, the amount of income subject to each percentage tax will be less than if you’re married filing jointly.

Here’s a comparison of the percentages based on the two filing statuses.

As you can see by comparing the two, people who file their taxes as Married Filing Jointly have about double the amount in each tax bracket until they get to the 35% and 37% tax brackets.

Now let’s take a look at a couple more examples:

Let’s say you make $100k, and to keep things simple, let’s also pretend there are no such things as deductions.

If you were single, you’d have $10,275 taxed at 10%, then $31,500 taxed at 12%, then $47,300 taxed at 22%, then the last $10,925 would be taxed at 24%. This would result in $17,835.50 in total taxes paid. (You can use the shortcut in the “Taxed Owed” column to skip calculating bracket by bracket.)

If you were married filing jointly, you’d have $20,550 taxed at 10%, then $63,000 taxed at 12%, then $16,450 taxed at 22%. This would result in $13,234 in total taxes paid.

Step #3 - Understand Marginal Tax Rate and Average Tax Rate

In order to proper determine your tax rate for RSUs, there are two important tax rate terms you should be familiar. Marginal Tax Rate and Average Tax Rate.

Marginal Tax Rate means your highest tax rate.

Average Tax Rate is your total taxes paid, divided by your income.

In the previous example, our Single person had a marginal tax rate of 24% and our Married Couple had a marginal tax rate of 22%. Our Single person had an average tax rate of 17.84% and our Married couple had an average tax rate of 13.23%.

If you’re looking at those numbers and thinking that you should get married to save some money on taxes, that’d probably be a better idea for a screenplay than something you’d want to do in real life!

Step #4 - Add Up Income

Now that you have a better understanding of the progressive tax system and basics of tax filing, you should be ready to learn how to determine your tax rate for RSUs. (Please note: As mentioned previously, this is an “accurate enough” estimation for planning purposes. We’d suggest consulting with a tax professional if you’re looking for an exact estimation.)

For determining your tax rate for RSUs, the two main sources of income you want to make sure you include are: 

1. Your salary/combined salary 

2. The total amount of bonuses or commissions you’re expecting

If you have side hustles or other income, you’re welcome to include it. However, if your side hustle only brings in a few hundred bucks a year, it’s unlikely to impact the calculation much.

Step #5 - Determine Standard Deduction & 401(k) Contributions

If you’re an employee of a company issuing RSUs, you’re pretty limited in terms of the number of deductions you’re allowed to take. TurboTax has a good list of popular deductions, but for the sake of getting our calculation mostly right (without you having to stress over what’s a deduction vs what’s a credit), we’re only going to look at reducing your income by two numbers.

1. 401(k) contributions

2. Your Standard Deduction

For your 401(k), as long as you have selected the pre-tax option for your 401(k) contributions, your contributions to your 401(k) will directly reduce the amount of income the IRS says you’ve received. You’ll want to look up how much you (and your spouse if applicable) have contributed or expect to contribute to 401(k)s.

For the Standard Deduction, the government automatically gives most people a tax break. For 2022, if you’re Single you get to reduce your income by $12,950. If you’re Married Filing Jointly, you’ll be able to reduce your income by $25,900.

Some people itemize their deductions, which means they add certain qualified expenses together and if they add up to more than the standard deduction they go with that instead. Common itemized deductions are mortgage interest, property taxes, and charitable donations.

For the purpose of this exercise, subtracting out your 401(k) contributions and your standard deduction will get you close enough.

Step #6 - Subtract Deductions From Income To Get Taxable Income

Now that you’ve gathered your salary, 401(k) contributions, and have determined your standard deduction amount you’ll want to combine it all together so we can get to what will be considered your taxable income.

Here’s an example of a married couple making $170k while also contributing $15k to their 401(k)s.

As you can see, their total income, not including any RSUs, is $170k minus $15k minus their standard deduction of $25,900.This brings their taxable income without including RSUs to $129,100.

Step #7 - Add RSU Income to Taxable Income

Now that you have your taxable income without RSUs, you’ll want to add in your RSU income.

There are two methods to do this and which of the two you use will depend on the time of year in which you’re doing the estimation. 

1. If you’re doing an estimation in the middle of the year, look at your paystub to see where it shows the RSU income year to date (YTD). Then, add that number to an estimate you apply to the remaining RSUs you expect to vest in the year.

2. If you want to estimate everything, you can take the number of RSUs you expect to vest in the year multiplied by some expected share price.

With either option, once you have your total estimated RSU income for the year, you’ll add that number to your Pre-RSU Taxable Income number.

Referencing our previous example, let’s say that we expect to have 5,000 RSUs vest at $15/share. This would mean that we would have another $75k worth of income.

With that extra $75,000 of income from your RSUs, your income would go up to $204,100.

Step #8 - Compare All Taxable Income to the Tax Rates

Once you have your Taxable Income number that includes all vested/vesting RSUs, you’ll want to use that number to see where you fall within the tax brackets.

Using the example above, we’d take $204,100 and look it up on the Married Filing Jointly tax brackets.

Doing this, we’d see that we are toward the bottom of the 24% Marginal Tax bracket. 

And if these were the only items on a tax return, and we apply the instructions on the tax bracket, we’d expect to pay $36,655 in federal income taxes. (This means that our Average Tax Rate would be just under 15%. $36,655 / ($170k + $75k).

Note: Please feel free to tinker with some of the calculations using made up examples of your own. If enough people ask, we’ll build a calculator for you, but we kind of like being that teacher that makes you avoid using calculators! 

Final Thoughts on RSU Tax Rates

Because RSUs are taxable upon vest, they are essentially no different than salary or bonuses so we usually advise that you treat them as such.

Since RSUs are tied to your company stock price, you may find it beneficial to sell all or a large portion of them every time you have RSUs vest.

Your tax rate for RSUs is no different than your regular tax rate; however, what is different is that usually companies will withhold at a flat 22% instead of what your actual tax rate is. Since there’s a difference there, it’s important for you to be able to estimate your own tax rate (that “accurate enough” estimate we discussed previously) so you can roughly determine if you’re going to be unwithheld or not.

RSUs are awesome, but they do have to be managed properly. Estimating and planning for the taxes associated with them is all part of that process. We hope the information in this article helped and if you want to check out are other articles on RSUs, our most popular articles are, “RSU Basics" and “Tips for Negotiating RSUs.”