If you recently started earning restricted stock units (RSUs), you may be wondering what this means for you — and for your taxes.
RSU taxes aren’t overly complicated, but the boost to your compensation may be enough to require you to re-evaluate other aspects of your financial life, from your income tax withholding to your retirement savings strategy, says Ross Anderson, a certified financial planner and co-founder of Craftwork Capital in Alexandria, Virginia.
To understand the ripple effects of equity compensation, let’s start with the RSU tax basics.
How are RSUs taxed?
RSUs are taxed as ordinary income at the time they vest. When you sell the shares, you may owe capital gain taxes, depending on whether you earned a profit on the sale, as well as other factors.
How are RSUs taxed when granted?
You likely were granted RSUs as part of a compensation package when you were offered a job, or perhaps alongside a promotion or raise.
At this point, your RSUs are a promise to issue stock at a later date, but whether you actually see those shares depends on meeting certain conditions
. That often means waiting until the shares vest over a period of years.
Because you technically don’t own the stock during this period, you don’t owe any taxes yet.
How are RSUs taxed when vested?
When your RSUs vest, ownership transfers to you, and as far as the IRS is concerned, that makes them income
.
At this point, how much you owe on vested shares depends on their value, which is based on how many shares you received and their market value on the vest date. RSUs are taxed at your
marginal income tax rate
(the same as your other wages), and your employer must withhold the required taxes. Your company may withhold stock to cover your taxes or you may be required to sell shares. Paying taxes out-of-pocket also may be an option.
🤓
Nerdy Tip
How withholding happens upon vesting depends on elections you make with your company at the time RSUs are granted. “What most people do is choose to have shares withheld for taxing the shares as they vest,” Anderson says. “Choosing to pay the taxes yourself, you’d have to be really bullish on the company.”
How are RSUs taxed when sold?
When you sell your RSUs, you may owe
capital gains tax
if you earned a profit on the sale.
At this point, the actual tax rate depends in part on how long you held the stock.
-
Less than a year? Short-term capital gains are treated as ordinary income.
-
More than a year? Long-term capital gains are generally taxed at a lower rate, up to 20%, depending on your household income.
How much are RSUs taxed?
Consider the following scenario:
-
You are granted 1,200 RSUs at the time you join a company. The vesting schedule dictates that 25% of the shares will vest per year over four years.
-
On your one-year anniversary, 25% of the shares vest, transferring 300 shares to you. The stock is worth $10 per share on the vesting date.
-
When you decide to sell your shares, their value has increased to $12 per share.
-
For this example, let’s say your single household income is less than $533,400 in 2025, which means the applicable long-term capital gains tax is 15%.
Here’s generally how much your shares would be taxed.
|
Nothing. The shares have been pledged to you but have not been transferred yet. The promised shares have not yet been handed over to you. The value of the vested shares is calculated as follows: 300 shares x $10 = $3,000. At a 22% tax bracket, the tax owed would be $660. The capital gain from selling the shares would be $600 ($3,600 – $3,000). The short-term tax on the capital gain would be $132 (22% of $600) and the long-term tax would be $90 (15% of $600). It is important to consider various factors when dealing with RSU taxes. People receiving RSUs for the first time may be surprised by how it impacts their financial situation. Taxes play a significant role in this, as your earnings may increase even if your paycheck remains the same. It is recommended to reassess your financial situation when receiving an equity grant. Three essential considerations include checking your withholding, revisiting your retirement savings strategy, and considering your selling strategy. When RSUs vest, they are considered supplemental income, and it is crucial to ensure that the tax withholding rate is appropriate for your situation. If the value of your RSUs changes your tax bracket, it may be wise to review your retirement savings accounts. Additionally, having a selling strategy for your RSUs is essential, considering factors such as your belief in the company and tax implications. sentence as follows: “Please rewrite the sentence.” phrase “The quick brown fox jumps over the lazy dog” as “The fast brown fox leaps over the inactive dog.”
Add A Comment
|