When your company goes public, it’s an awesome feeling. The company has made it and so have you. You can now see the value of your shares on a day to day basis. However, double trigger RSUs at IPO often lead to a high tax bill.
Double Trigger RSUs
Remember that for you to take ownership of these RSUs, two conditions must be met:
1.) Work tenure
2.) An IPO or sale of the company.
Once the triggers are met, you take ownership of the shares. There is no action required on your part.
RSU Taxes
RSUs become taxable income at the time of vesting. You will need to pay withholding tax on the RSU shares, just like your salary.
If your withholding tax on the RSUs is too low, you may owe additional taxes to the IRS on April 15th. Here’s why – the federal withholding rate on RSUs is 22% and this may be lower than your effective tax rate on your salary.
Additionally, state withholding taxes vary so it all depends on where you live.
Double Trigger RSUs at IPO
With double trigger RSUs, you will have a large influx of income along with a huge tax impact in the year of your company’s IPO. Pay attention to your withholding rates and be prepared for a higher tax bill!
Remember: the date your shares vest (IPO date) and the date you can actually sell them differs. If the stock price goes down substantially from the IPO date, you will still owe income taxes based on the vesting price (IPO price). Going forward, the vesting price (IPO price) will be your cost basis for future capital gains tax calculations.
Recordkeeping for Accurate Taxes
Keeping detailed records of what you own and their associated costs is important. Many times the Form 1099 will show zero cost for your RSUs. This is incorrect.
By law, custodians (Fidelity, Schwab, etc.) are no longer required to report the cost basis to the IRS. If you report your taxes using an incorrect Form 1099 with a zero cost basis, you will overpay your taxes.
Instead, obtain your Form 1099-B (1099 Supplemental) from your custodian to keep track of your cost basis in the shares. This form will have the appropriate cost basis and you will pay the correct taxes.
An IPO is a very exciting time. As a holder of double trigger RSUs, acknowledge that you will have a higher tax bill and keep your records straight for accurate reporting.
Questions about your double trigger RSUs?