Restricted Stock Units (RSUs) and Taxes
Restricted stock units (RSUs) are a form of equity compensation offered by companies to their employees. They are a promise to deliver a certain number of company shares to the employee at a future date, typically when the employee satisfies certain vesting requirements, such as remaining with the company for a certain period of time or achieving certain performance goals.
RSUs are considered taxable income to the employee when they vest and the shares are delivered. The amount of taxable income is equal to the fair market value of the shares on the date they vest, minus any amount paid by the employee for the shares (if applicable). For example, if an employee is granted 100 RSUs with a vesting date of January 1, 2022, and the fair market value of the company's shares on that date is $50 per share, the employee will have $5,000 of taxable income (100 shares x $50 per share).
The tax treatment of RSUs can be complex, as there are several factors that may affect the taxability of the income, such as the timing of the vesting, the employee's tax filing status, and the employee's other income in the tax year. Here are a few key points to consider when it comes to the taxation of RSUs:
Withholding: When RSUs vest and the shares are delivered, the company is required to withhold a portion of the employee's pay to cover the taxes owed on the income. The withholding is based on the employee's tax bracket and the amount of taxable income from the RSUs. The employee can choose to have additional withholding taken out of their pay to cover the taxes, or they can make estimated tax payments to the IRS to avoid underpayment penalties.
W-2 reporting: The income from RSUs is reported on the employee's W-2 form as "wages, salaries, and tips." It is included in the employee's taxable income for the tax year in which the RSUs vest and the shares are delivered.
Capital gains tax: When the employee sells the shares received from the RSUs, any gain or loss on the sale is subject to capital gains tax. The gain is calculated by subtracting the employee's basis in the shares (generally, the fair market value on the vesting date) from the sale price. The capital gains tax rate depends on the employee's tax bracket and the length of time the shares were held before being sold. If the employee holds the shares for more than one year before selling, the gain is considered a long-term capital gain and is taxed at a lower rate.
Alternative minimum tax (AMT): The income from RSUs may be subject to the AMT, which is an alternative tax calculation that may result in a higher tax liability for certain taxpayers. The AMT is designed to ensure that taxpayers with high levels of income pay at least a minimum amount of tax. The AMT is calculated by adding back certain deductions and exemptions to the taxpayer's regular taxable income, and then comparing the result to the AMT exemption amount. If the result is higher than the exemption amount, the taxpayer may owe AMT.
Net exercise: Some employees may have the option to "net exercise" their RSUs, which means they can pay for the shares with the proceeds from the sale of the shares. This can be beneficial for employees who want to sell the shares immediately after they vest, as it allows them to avoid paying the upfront tax on the full value of the RSUs. However, it is important to note that the employee will still be subject to capital gains tax on the sale of the shares.
To sum it up, it is important for employees to understand the tax implications of RSUs and to plan accordingly to avoid underpayment penalties and other tax issues.