Restricted Stock Units (RSUs) are wonderful, but sometimes they can increase your taxes unexpectedly. Instead of helping you build wealth they can sometimes “Really Suck Up” your money through additional taxes. Here are some pointers on how to manage RSUs and taxes so that you can have less stress in your life.
Withholding Taxes
RSUs are a form of compensation and share ownership. Confusing! Once you take ownership of them, you will have to pay withholding taxes.
Sometimes the tax withholding rate on your RSUs is too low in comparison to your salary. When this happens, you can have an unexpected tax bill. RSUs and taxes are tricky.
For example, you are in the 37% federal tax bracket for your salary, but you only withhold 20% from your RSUs. Many companies use 20% as the default setting, so check your company portal to see what your withholding rates are.
If the withholding rates are the same you should be good to go. But if the RSU withholding rate is lower, speak with your CPA about perhaps adjusting this amount upward.
Surprise Tax Bills
When there is a mismatch on the withholding rates, you can get an unexpected tax bill in April. Hopefully you have the cash on hand to pay it!
You can avoid this surprise tax bill by increasing your RSU withholding amount. You may also have to make quarterly tax payments. Work with your tax advisor on setting this up.
Paying the amount over 4 quarters during the year will soften the blow. This is complicated, but at least you’ll know the amount you have to pay. Unfortunately, you always have to pay your tax amount that is owed.
Capital Gains Taxes
Once you take ownership of your shares when the RSUs vest, you will be watching the share price incessantly. When you do decide to sell your shares, you will have to pay capital gains taxes.
The amount of capital gains depends on how long you own the shares. For one year or less, you will pay short term capital gains tax, the same tax rate as your ordinary income bracket.
For one year and a day (or longer), you will pay long term capital gains taxes, ranging from zero to twenty percent tax on the gains.
Stock Prices
With ownership in your company, it’s a hard decision when to sell stock. Here are a few pieces of advice. One, don’t let your tax decision overshadow your choice to sell stock. If you are able to get a favorable price in the short run, it may be better to sell. If you wait for a favorable, long term capital gains rate, the stock price may decline in the interim.
Also, don’t be focused on a certain price to sell your shares. Remember our friend Roger who wanted to sell his company shares at $80? The price was $2 away from his target, and he didn’t sell. Then the shares went lower. They kept going lower, and lower. Eventually he sold, and lost $800,000!
Last, it’s best to make a systematic plan so you sell off shares at regular intervals. This way you can manage your share ownership, taxes, and your cash flow. When you do this you can move RSUs from “Really Sucking Up” your money to having “Really Sweet Upside.”
If you want to chat about RSUs and taxes, let’s do it!