Restricted Stock Units (RSUs) are a form of compensation offered by many employers, especially in the tech and corporate sectors. Unlike stock options, which require employees to purchase stock at a set price, RSUs are granted at no upfront cost and are subject to tax once they vest. Understanding how RSUs are taxed is crucial for managing the potential tax implications effectively.
Taxation at Vesting
The primary taxation event for RSUs occurs when they vest, meaning when the employee gains full ownership of the stock. Until this point, RSUs are essentially a promise to transfer shares at a future date, contingent on meeting certain conditions (such as continued employment or performance targets). Once the RSUs vest, they are treated as ordinary income and are taxed as W-2 wages, similar to your regular salary.
Federal and State Taxes
At the time of vesting, the fair market value (FMV) of the shares is included in your taxable income. For example, if 100 RSUs vest when the stock is worth $50 per share, you’ll be taxed on $5,000 as ordinary income. This amount will be reported on your W-2 form, and it will be subject to federal income tax at your applicable tax rate.
In addition to federal taxes, RSUs are also subject to state taxes. The rate varies depending on the state in which you reside. For instance, states like California or New York may have high-income tax rates that impact the overall tax burden from RSUs. Therefore, it’s important to factor in your state’s tax rules when calculating your tax obligations.
How Are RSUs Taxed
FICA Taxes
RSUs are also subject to FICA taxes, which include Social Security and Medicare taxes. The combined FICA tax rate is 7.65% for employees, and this is applied to the vesting value of the RSUs. It’s important to note that FICA taxes are withheld at the time of vesting, so they are automatically deducted from your paycheck.
Planning for RSU Taxes
Because RSUs can result in a significant tax liability, it’s essential to plan ahead. In some cases, companies may allow employees to sell some of the vested shares to cover the taxes. Alternatively, employees may need to set aside funds to pay the tax bill come tax time. Consulting with a tax professional or financial planner can help you navigate the complexities of RSU taxation and optimize your financial strategy.
