RSU and Taxes: Restricted Stock Tax Implications
Loyal employees often get perks for outstanding job performance, but most companies expect you to pay your dues before the benefits rain down. If you have an influx of restricted stock income coming your way soon, it’s a good idea to learn all you can about RSU and taxes.
What Is RSU Income?
If you work with the same company for several years, you may approach the coveted benchmark of every long-term employee: vesting. When you become vested, you finally get to celebrate all those benefits you worked hard to earn all these years. This may include RSUs, or restricted stock units.
RSUs are like stock options, but there’s one obvious difference: they have restrictions. When first hired, your employer promised you a set number of company shares. When you receive those shares depends on your vesting schedule. In some cases, you may get a certain percentage after one year of employment, followed by a greater percentage the next year. Some employers may hold back all shares until you’re fully vested.
The moment those RSUs officially become yours, the shares get converted into income. Like any income you earn, you need to report it to the IRS when tax season arrives.
How Does RSU Income Affect Your Taxes?
You know now that restricted stock units count toward your income, so it’s no surprise that paying taxes on RSUs is mandatory. The IRS designates your RSU income as supplemental wages, which are subject to a federal tax of 22%.
Typically, you can handle this in one of the following three ways:
- Your employer takes back some of the promised shares to cover the taxes.
- Your employer withholds an estimated portion from your regular paycheck.
- You sell enough of your shares to pay the taxes outright.
It’s important to note that if you decide to go the third route, you’ll need to pay a capital gains tax on top of the standard restricted stock taxes.
How Can You Get Help with RSU and Taxes?
Both your employer’s vesting schedule and method of payout have many RSU tax implications. It’s important to understand exactly what your employer promises you, when you receive it, and how you pay the taxes.
At taxhub, we guide you through these questions and help you pay taxes on restricted stock units the right way. Ask us how we can help!