When Do I Owe Taxes on RSUs?
Restricted Stocks Units (RSUs) are the most common form of equity compensation and nearly all public companies grant them. Pick any company that’s publicly traded and there’s a 98% chance they offer RSUs to people at the company.
You’ve probably asked yourself, “When do I owe taxes on my RSUs?” and our goal is to answer that question, plus advance your knowledge so you can manage your RSUs properly. We believe that understanding how your RSUs are taxed is vital in properly managing them.
When Do I Owe Taxes on RSUs? - Short Answer
You’ll owe taxes on your RSUs the day they vest.
You’ll owe additional taxes if you sell your vested RSUs for a gain.
Even though this short answer is simple, setting aside the proper amount of tax, especially as your RSUs vest, can be challenging and employers don’t get it perfect. (We built an RSU tax calculator that helps estimate if you’re underwithheld or not.)
All of the Taxes Paid at an RSU Vest
Few people understand all the various taxes that come into play when you receive a paycheck or when an RSU vests.
The four taxes you’ll owe when you receive a paycheck or when an RSU vests include:
Federal Income Tax - Varies based on income
Social Security Tax - 6.2% up to $168,600 then 0% after that
Medicare Tax - 1.45% then an additional .9% if over $200k if single or $250k if married
State Income Tax - Only applicable in certain states like California, also varies based on income.
Let’s look at an example of how your normal paycheck works. This will be a little bit of an oversimplification, but will still prove to be useful:
Let’s say you earn $120k working at Apple in the Bay Area. Your pre-tax monthly income would be $10k a month.
$10,000 = Gross Monthly
Now subtract the following:
22% or $2,200 = Federal Tax Withholding
6.2% or $620 = Social Security Tax Withholding
1.45% or $145 = Medicare Tax Withholding
10.23% or $1,023 = California Tax Withholding
$6,012 = Your Monthly Take Home
As money becomes taxable to you, your company sets aside money for you so that you can cover your tax bill when your taxes are due April 15th the following year.
Although this example is specific to salary, it’s also applicable to RSUs as they vest.
In fact, when RSUs vest companies will usually only withhold at a rate of 22% until you start making over one million dollars, in which case it bumps up to 37%.
This means that if you’re actually above the 22% tax bracket, and make less than one million a year, you could potentially owe additional taxes when they’re due on April 15th the following year. It also means that you could potentially owe penalties for not withholding enough throughout the year!
RSU Tax at Vesting and Promise to Pay
RSUs are a unique form of equity compensation because they become taxable to you as they vest. Let’s compare RSUs to your salary.
Your employer has a contractual promise to pay you a salary every couple of weeks. You don’t owe taxes on the income you haven’t yet received because there’s always the chance that you could quit or get fired.
RSUs work in a similar way. If you’ve received a grant of RSUs, your employer is promising to pay you at a later date only in the form of stock. If you quit or are fired before that later date is reached, you won’t ever receive those RSUs so you won’t owe taxes on them. RSUs become taxable to you as they vest and have officially been paid out to you.
Here’s a standard four year vesting schedule:
As each vesting date occurs, a portion of the RSUs vest and become taxable. As we stated previously in our RSUs Basics article, you will not have to pay to purchase the RSUs, but you will have to pay taxes on them.
So when these vesting dates hit, you’ll owe federal income tax, state income tax, medicare tax, and social security tax based on the number of RSUs vesting multiplied by the current share price. Your company will typically withhold shares for you to cover the tax withholdings.
How to Calculate RSU Taxable Income
To determine the amount of RSUs that are taxable to you in a given year, you take the following:
# of Newly Vested RSUs
x
Market Value on Vest Date
=
Amount That’s Taxable
Building on the previous example, here’s what 1,000 RSUs vesting over four years might look like:
In the example above, it’s pretty easy to calculate the taxable amounts since there’s only one batch of RSUs that’s vesting each year. Once you have that taxable amount, you can estimate the taxes you’ll owe by multiplying the taxable amount by your estimated tax rate.
Many companies have vesting schedules that switch to quarterly or monthly after the first year. This means that you will have to run this calculation multiple times throughout the year as each group of RSUs vest since the market price of the company will change.
Fortunately, most companies do the math for you and will report vesting RSUs on your paystub and also include a yearly report on your W-2.
Tax Withholding on RSUs and Salary
Every few weeks, your employer pays you and also sets aside some taxes on your behalf. This happens because the IRS has rules that require people to set money aside before filing their taxes.
If you’ve ever received a tax refund, it’s because you set aside more money throughout the year than you owed in taxes for that year.
If you’ve had to pay taxes after doing your tax return, it was because you didn’t set aside enough money throughout the year to cover the taxes you accrued (which isn’t necessarily a bad thing).
The IRS also sets special withholding requirements for different non-salary types of income you may receive from your employer. These can include things like bonuses and, you guessed it, RSUs.
It is important to note here that if you don’t withhold enough taxes throughout the year, you’ll not only owe taxes at the end of the year, but you may also owe penalties for not having withheld enough.
RSU Taxes After Vesting
As we’ve discussed, your RSUs vest and become fully taxable to you. When this happens, the entire vested amount is now considered to be your “cost basis.”
So if you had a $10,000 worth of Apple RSUs at vest, your cost basis would be $10,000 since you had to pay taxes on the full $10,000.
From that point on, the stock price of Apple can move in three directions. Apple’s share price can go up, down, or stay flat. The more time that passes from the vest date, the more likely it’s not going to stay flat.
When you ultimately decide to sell, you’ll likely have a gain or loss. This gain or loss is known as a Capital Gain or Capital Loss.
If you sell for a Capital Gain you’ll owe taxes and the taxes will vary based on the time you’ve held the investment.
If you sell for a Capital Loss, you’ll receive a deduction based on the loss you lock in.
Basics of Capital Gains and Capital Losses
There are two types of Capital Gains and two types of Capital Losses, however, for this article we’re going to say all Capital Losses are the same.
Long-term Capital Gains are owed when you sell an asset after holding it for 365 or more days.
If your grant of Apple RSUs vested on 1/1/2024 you could sell the shares on 1/2/2025 or later to receive Long-term Capital Gains treatment.
The benefit of holding for Long-term Capital Gains treatment is that there is a different tax calculation than for ordinary income and paychecks. The tax rate can be 0%, 15% or 20%. Here’s a link to a Long-term Capital Gains tax bracket.
Short-term Capital Gains are owed when you sell an asset after holding it for less than 365 days.
If your grant of Apple RSUs vested on 1/1/2024, your gain would be treated as a Short-term Capital Gain if you sold anytime before 1/1/2025.
Any gain is great, but Short-term Capital Gains get lumped in with your ordinary income and usually result in higher taxes.
A Capital Loss is received anytime you sell an investment for less than your cost basis.
If your grant of Apple RSUs vested at $10,000, but you later sold them all for $9,000, you would have a capital loss. Depending on what other gains you had for the year, you could either subtract your losses from your other gains, or if there aren’t any, you’d likely be able to take a deduction for this Capital Loss.
Example of When You Owe Taxes on RSUs
For example, let’s say you received a grant of $14,400 of RSUs on 1/1/2020 that vests over 4 years (25% each year). You’re already making $100k so you’re pretty excited.
This grant grows to be worth $16,000 on 1/1/2021 when the first 25% vests. Meaning $4,000 vests and becomes yours.
You sell $2,000 worth of shares immediately as vesting happens.
You sell $1,200 worth of shares 6 months later.
You sell the last $1,200 worth of shares a year later on 1/2/2022
*We’re assuming the price continues to go up.
Take another second to reread the “Notes” row of the table since it explains the taxation of each event. If you want to visit the Google Sheet this was created in here’s the link.
How to Address Taxes on RSUs
Now that you have a better understanding of when and how you’ll be taxed on your RSUs, you’ll want to start making a plan to sell your RSUs.
There are many factors to consider when selling RSUs. It’s often recommended to sell RSUs immediately after vest if you’re able to.
Many financial professionals recommend that you treat your RSUs like a cash bonus and to sell everything that vests so that you can reinvest and use the cash elsewhere. While this can be an effective strategy, you’ll need to be sure that you actually reinvest the proceeds.
If you want to take on extra investment risk and leave some of your RSUs unsold, we recommend designating a percentage to keep from each vested batch and selling the remainder.
When You Owe Taxes on RSUs - Conclusion
You don’t have to understand all the tax details of your RSUs, but a base level of understanding will empower you to make smart decisions. You’ll be more confident when asking for RSUs, when receiving RSUs, and when selling to diversify into other investments.
Our recommendation, like many others, is to treat RSUs like cash. If a vested RSU is worth $25k, you have to think if you’d want to leave $25k invested in your company. We published an article describing how much company stock is too much and to make your life easier, we built out an RSU Tax Calculator to help make estimating taxes a little bit easier.
As always, thanks for reading. We’re happy to answer any follow up questions you might have: