RSU (Restricted Stock Unit) is a common form of equity incentive used by companies to reward employees. It represents a promise from the employer to grant a specific number of company shares to the employee on a future date or upon meeting certain conditions. RSUs are restricted stocks subject to specific conditions, and they differ from ordinary stocks in that employees can only receive them after a predetermined period known as vesting.
Now, the question arises: Do you have to pay taxes on these paper money employee benefits? The answer is yes. However, when and how to pay taxes varies depending on the type of stock, and many people make mistakes or pay taxes incorrectly, often unaware that they have paid double taxes. Mishandling this can lead to receiving a CP2000 Letter from the IRS, demanding back taxes along with substantial interest.
🌟RSUs primarily involve three time points:
Grant: No tax is due at this stage.
Vesting: The value of vested RSUs is included in your W-2 form, and income taxes are withheld accordingly. The cost basis for the vested shares is the price per share at vesting. It's important to note that some companies may forcibly sell a portion of the vested stock to cover the withholding tax reported on the W-2. Adjustments should be made when filing the 1099 form.
Liquidation: Capital gains tax applies when the RSU shares are sold.
➡️There are two common situations where individuals often make mistakes during tax filing:
a) Forced sale of vested shares for tax withholding, unbeknownst to the individual:
When your RSUs vest and the value is included in your W-2, tax withholding is necessary. Some companies choose to forcibly sell a portion of your shares on the vesting day to cover the withholding tax. This means that even if you don't sell your shares voluntarily, a portion of the vested shares will be sold by the company to cover the withholding tax. Since shares are sold, the brokerage will report the transaction to the IRS, and you will receive a 1099 form in the following year.
b) Double taxation on RSUs without realizing it:
When RSUs vest, a portion of the shares is already sold by the company to cover withholding tax. In the year when you sell your shares, an adjustment should be made; otherwise, you would be subject to capital gains tax on the shares that were already taxed at vesting.
It is essential to be aware of these considerations and make appropriate adjustments when filing your taxes to ensure accurate reporting and avoid double taxation.
Please note that this information is provided for general informational purposes only and should not be considered as professional tax advice. For professional analysis and tailored advice, please contact us. Thank you.