The Tech Employees Guide to Restricted Stock Units (RSUs)
– est. 7-minute read
In this blog post, Anthony Ferraiolo, Wealth Advisor, details the intricacies of restricted stock units (RSUs), how they are taxed, pitfalls to avoid, and how to plan around them.
Key Takeaways:
• RSUs are taxed upon receipt often referred to as your vest date
• You may owe additional taxes on your RSUs
• Avoid double taxation of your RSUs and tax penalties with Tony’s Tips
• Review your RSUs as part of your overall portfolio & net worth
• Don’t count your chickens before they hatch, RSUs are volatile bonus income
• If you wouldn’t use a cash bonus to buy your company’s stock, why are you holding your RSUs?
Sample Tech Executive RSU Situation
Jerry Bloch 👱♂️💻 is a software engineer at Amazon, and he makes $300K in salary, plus 1,000 RSUs that vest quarterly (250 per quarter).
When Jerry started at Amazon, he filled out a form W4 which withheld approximately 25% of his paycheck for Federal Taxes. However, Jerry’s salary puts him in the 35% marginal tax bracket.
Then each quarter Jerry receives 250 shares of AMZN at $150 per share, for a total value of $150,000 – way to go Jerry!
Once tax time comes around, Jerry’s does his taxes and sees that he owes thousand in taxes, plus penalties! 🤯
What went wrong?
Unfortunately, Jerry’s employer treats RSUs as bonus or supplemental income (most do), and they withheld a flat rate of 22%, but Jerry’s RSU income pushed more of his income into the 35% tax bracket. That’s a 13% tax delta!
Jerry owed all these taxes but didn’t have the liquid funds to pay the taxes, therefore, he was forced to sell some of his Amazon stock in April when the price was $100 per share to cover the tax bill.
So, Jerry paid income taxes on $150K per share value, but only received $100K per share.
This is a losing formula for managing your RSUs.
Tips & Tricks for Managing RSUs and Taxes:
1. Understand your marginal tax bracket.
2. Avoid penalties using the Safe Harbor Rules.
• Pay 90% of this year’s tax liability or 110% of last year’s tax liability .
3. Consider selling your RSUs at vesting and using the proceeds to pay the tax gap .
4. A few days after your RSUs vest, download the statement that breaks out the cost basis and tax information.
• This may help avoid double taxation, due to missing cost basis when you sell the stock.
5. Aim to keep your company stock allocation to less than 10% of your total portfolio .
6. Don’t rely on your RSUs to fund specific goals because the values can change drastically.
• For example, in 2022 Amazon stock started the year around $150 and got as low as $100. What you expect to be $150K could end up being $100K.
7. Get familiar with https://directpay.irs.gov/ , consider quarterly tax payments.
8. Consider adjusting your W4 withholdings to reduce size of the tax payments.
9. Complete a yearly tax projection before the end of the year.
10. Hire a professional to help proactively plan for the unexpected.
Want to avoid being hit with unexpected taxes on RSU’s?
We can help. Schedule a meeting with one of our experts for a free analysis and to discuss your options.
Please note: The above case study is hypothetical – it does not involve an actual client. Case studies are intended to illustrate the hypothetical experience of a fictitious client based on a scenario that an actual client might experience. Case studies are designed to illustrate how we may provide investment advisory services through Mariner Platform Solutions (MPS) to our clients. Remember that no two clients, situations, or experiences are exactly alike. Case studies are not to be construed as an endorsement or testimonial of any of its past or current clients, nor any assurance that we may be able to help any client achieve the same results. To the contrary, no case study should be construed by a client or prospective client as a guarantee that they will experience a certain level of results or satisfaction if engaged in investment advisory services available through MPS.