If you work in tech, some of your compensation will undoubtedly come in the form of equity. Startups give stock options; larger tech companies like Linkedin usually give RSUs (restricted stock units). There are a variety of reasons why this difference exists, like properly aligning employer/employee incentives and tax implications. You can read about them in this Quora thread. This post specifically is for those dreading the looming tax day (April 18 in 2017), to help guide the proper reporting of RSUs on tax returns. Basic tax knowledge assumed.
The standard scenario is an RSU grant that vests over 4 years. You don’t have to worry about the original grant price of the RSUs for the purposes of your tax return, as you do not pay taxes at the time of the grant1.
ExampleA new employee receives a grant of $100,000 worth of RSUs vested over 4 years. The stock price at the time of the grant is $100, so the employee receives 1000 RSUs over 4 years, or 250 RSUs per year.
At each vesting instance, the RSUs you receive are treated as ordinary income, and the company will automatically sell a certain % of them to cover taxes. The stock units automatically sold for taxes is not exact and you will have to make up the difference when you file your return. The stock units that you do receive are now treated the exact same as regular stock:
- if you sell at the same price as at which vested, then you have no additional tax liability
- if you sell at a lower price, then you can claim losses
- if you sell at a higher price, then you have tax liabilities on capital gains (short- or long-term depending on when you sell) on the additional gains
ExampleAfter the first year goes by, the employee receives 250 shares, of which 87 (about 35% of 250) were withheld and sold for taxes. The stock price has increased to $200 by this time, so the employee’s ordinary income has now increased by the value of the gross amount, or $50,000 (250 shares x $200). The employee immediately sells all of the vested shares at the vest price, $200, for $32,600 (167 shares x $200). The only tax implication in this scenario would be the need to cover the difference between the employee’s actual tax rate vs. the 35% rate automatically withheld.
The key to remember is that, at vesting, your received RSUs are counted as just regular old stock that you’ve “bought” at the vest price, and thus your personal finance strategy should treat them as such.
There is a lesser-known “83(b) election” that allows you to prepay taxes on the entire value of your RSUs at the time of grant. People do not usually take this election because they may be paying taxes on RSUs that they never get due to leaving the company. ↩