Do you remember our handsome friend Lucas from the Long Island house party? He has various types of equity compensation and he wants to make sure that they don’t turn into money losing RSUs.
RSU Scenario
Here’s his compensation scenario:
- $375,000 base salary
- $200,000 of RSUs vesting over 4 years with no cliff
The RSUs were granted in 2024, so that’s one total year of vesting so far, but the amount vested is not a simple $200,000 x 25% calculation. The amount of RSUs depends on the company share price.
Detailed Tax Calculations
His RSUs have a $5.00 grant price, giving him 40,000 shares ($200,000 / $5.00 per share = 40,000 shares.) However, there is also withholding taxes on the RSUs. Lucas chose a withholding rate of 37% for his RSUs, so 14,800 shares go towards federal taxes and he is left with the remainder, 25,200 shares.
Luckily for him, the stock price is now $10.00, and it’s a $52,000 capital gain (($10.00 per share – $5.00 per share) * 25,200 = $52,000). If he decides to sell he will pay long term capital gains taxes because he has owned the shares since January 2024.
However, if the stock price did not double, he may have money losing RSUs. It’s hard to know where his company stock price will be in the future. Additionally, withholding rates can be a potential headache.
Withholding Rate Choices
When it comes to the withholding rate on your RSUs, you have a choice. The default rate is typically 22%, but you can choose a higher rate if you wish. With tax season right around the corner, this may make your life easier.
Many times, individuals have a withholding rate set to the default rate of 22%. They are surprised to find out that they owe the withholding rate of 37% when April 15th rolls around. Sometimes, when there is a large RSU amount vested, there could be a cash shortfall for the tax bill. Other times, there is not a shortfall, but the sting of having a large unexpected tax bill is upsetting and stressful.
How can you avoid a surprisingly large tax bill on April 15th and bypass money losing RSUs?