Restricted Stock Units (RSUs) and Tax Planning

Restricted stock units (or RSUs) have the potential to help you build significant net worth over time, but they require some careful planning—especially when it comes to their potential tax liability. If you’re weighing an equity compensation package that includes...

Restricted stock units (or RSUs) have the potential to help you build significant net worth over time, but they require some careful planning—especially when it comes to their potential tax liability. If you’re weighing an equity compensation package that includes RSUs or could use a refresher, here’s a brief overview of RSUs as well as the tax planning considerations employees should consider carefully.

How Do RSUs Work?

RSUs are a form of compensation issued by an employer to an employee in the form of company shares. RSU shares aren’t exercised (aka purchased) by the employee. Rather, they’re granted to the employee with a graduated vesting schedule.

As a reminder, a vesting schedule dictates when you may officially own your RSUs and have the option to sell them. Once RSU shares vest, they are yours to keep, even if you leave the company. By comparison, other types of equity compensation like employee stock options or incentive stock options give terminated employees an expiration date to exercise vested options (or lose them entirely).

RSUs vs. Stock Options

Employee stock options (ESOs) enable employees to purchase shares of their company’s stock at a strike price, meaning a fixed price as determined by the company. ESOs typically include a vesting schedule, which again, dictates when the employee may exercise their stock options. The general assumption of ESOs is that the strike price will be less than the market value of the share, meaning the employee is able to purchase at a “discount.” There is no guarantee, however, that a company’s stock will rise in value during the vesting period. It’s possible it could decline if the company performs poorly. The risk with ESOs is that by the time an employee’s stock options expire, they could be worthless.

By comparison, as long as a company’s share value doesn’t hit $0, an RSU will always be worth something.

What Are the Tax Implications of RSUs?

RSUs become taxable at two different times: when they vest and when they’re sold.

Vesting: Your RSUs are subject to ordinary income tax on the day they vest. To determine your actual tax liability, take the number of shares and multiply it by the market value of your company stock. For example, if 10,000 shares vest on January 1 and the market value per share is $20, the total taxable value is $200,000. Employers will automatically sell a certain amount of your shares to cover the tax burden on the vesting date. Depending on your full tax situation and anticipated tax bracket, however, this may not be enough to fulfill the entire tax obligation of your vested RSUs—as the default withholding rate for supplemental income (like vested RSUs) is 22%. If your tax bracket is above 22%, the withholding may not be enough and you will likely owe additional tax on the vested shares.

Selling: If you later opt to sell your RSUs and earn a profit from the sale (meaning they sell at a higher share price than what they vested for), you will be responsible for paying tax on the capital gains. For example, if your shares were worth $200,000 when they vested but you sell them all for $250,000, you’ll owe taxes on the $50,000 in capital gains (remember, you already paid taxes on the original $200,000 when the shares vested).

Capital gains are taxed at two separate rates, depending on how long the assets were held onto before being sold.

If you wait a year or longer to sell your vested shares, the gains will be subject to long-term capital gains tax rates, which can range between 0% and 20% depending on your total taxable income. If you hold onto shares for less than a year before selling, the gains will be taxed at a short-term capital gains rate (equivalent to your ordinary income tax rate, up to 37%). 

What About Double-Trigger RSUs?

Some companies implement a double-trigger vesting provision, which impacts when an employee can sell shares of their company stock. First, the shares must vest. Second, there must be a liquidity event, like an IPO or acquisition.

The benefit of double-trigger RSUs is that no income tax will be owed to the IRS until the second trigger (i.e. the liquidity event) occurs. 

Tax Planning Strategies for RSUs

By being proactive with your vesting schedule, you can better manage (and possibly minimize) the potential tax consequences of your RSUs. 

For example, some companies may allow you to elect to receive a smaller portion of your vested shares and use the remaining amount to cover the tax bill.


Other potential tax-saving strategies include:

Maxing out tax-deferred accounts: Contributions to your tax-deferred accounts reduce your taxable income for the year they’re made. In 2024, the contribution limits are:1,2 

  • 401(k), 403(b), 457, and TSP: $23,000 ($30,500 for those 50 and older)
  • IRA: $7,000 ($8,000 for those 50 and older)
  • Health Savings Account (HSA): $4,150 for individuals or $8,300 for families

You may want to plan to contribute more (or potentially max out contributions) the years your RSUs are vested or sold to help offset the additional tax burden.

Giving charitably: If you choose to itemize your deductions, you can deduct your charitable contributions from your taxable income—whether they’re donated directly to an organization or added to your donor-advised fund. Again, this may help offset the tax liability of your RSUs while achieving your philanthropic goals.

Time the sale: As we mentioned earlier, holding onto your shares can greatly reduce the capital gains tax liability when it comes time to sell. Because long-term capital gains tax is determined by your total taxable income, you may also want to wait and sell shares in a year where your income might be lower than usual (say you took time off between jobs or didn’t receive a bonus). 

Incorporating RSUs into Your Financial Plan

As with any other form of equity compensation—or investment, for that matter—it’s important to work with a knowledgeable professional who can help you incorporate your RSUs into your long-term financial plan and goals.

It’s important to still maintain diversification within your portfolio. When RSUs vest, for example, you may find your portfolio overconcentrated in employer stock. Your advisor can help you determine whether that’s the case, and discuss strategies for rebalancing effectively based on your risk tolerance and goals.

Whether you’re currently working for an employer who offers RSUs or you’re considering a job offer, we’re here to help you weigh your options and make informed, tax-focused decisions. Don’t hesitate to reach out to us today to learn more about how we can help.

Sources:

1401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000226 CFR 601.602:  Tax forms and instructions.