Your RSUs have a potential to be worth a lot of money that could substantially change the trajectory of your life and your financial situation. Keep in mind that there are several factors – RSU triggers and the taxes associated with them.
The two types of RSUs are single trigger and double trigger. The trigger(s) refer(s) to the conditions that have to be met for you to take ownership of your RSU shares.
RSU Triggers
RSUs have activation points that can cause anxiety, anger, and other strong emotions.
A single trigger RSU has one activation point – employee tenure. As long as you work at the company for the required amount of time the shares will be yours.
On the other hand, a double trigger RSU has two prerequisites – employee tenure and a liquidity event, like an IPO or sale of the company.
Tax Implications on a Single Trigger
When the single trigger vests you will owe ordinary income tax on the entire value of the shares that just vested. This value is calculated by the number of shares times the fair market value of the shares. And you will most likely have a lower withholding tax rate on the RSUs because they are taxed at supplemental federal wage rates (22%), which are lower than your salary withholding federal tax rate (higher than 22%).
This can lead to a large increase in taxable income. Unfortunately taxes must be paid at vest and when the company is still privately held you are unable to sell shares to pay the tax.
So you will have to come up with cash from somewhere else (sale of other investments, cash in the bank, or a loan from your wealthy uncle), as opposed to selling shares with a double trigger RSU.
Double Trigger Taxes
A double trigger RSU has two prerequisites – employee tenure and a liquidity event. On the second trigger, a liquidity event (IPO or sale of company), taxes are due.
The total number of vested RSUs times the share price on the date of the second trigger is your taxable RSU income.
The method for establishing the RSU income and the withholding tax is the same as single trigger RSUs. However, with an IPO there is a marketplace for your shares. You can sell them to cover your tax bill.
Going forward you will most probably have to pay estimated quarterly taxes in the future.
RSUs – Really Serve You
RSUs – both single and double trigger – can cause headaches.
By reading through and really understanding your RSU grant agreements, we can determine your timeframe, taxes owed, and other problems that could arise during your IPO.
Next week we will visit the exciting topic of your IPO documents.