Taxes on RSUs — from The Holloway Guide to Equity Compensation

The following excerpt is from The Holloway Guide to Equity Compensation, a detailed reference with hundreds of resources on stock options, RSUs, job offers, taxes, and more. You can read more from this excerpt, or access the full guide text here.

THE FULL VERSION OF THIS EXCERPT ANSWERS QUESTIONS LIKE:

How are RSUs taxed?

What are the tax implications of restricted stock units (RSUs) as equity compensation?

Are RSUs taxed when they are granted or when they vest?

When do I pay taxes on my RSUs?

When an employee is awarded RSUs, each unit represents one share of stock that will be given when the units vest.

Here’s the tax summary for RSUs:

• At grant: No tax
• At vesting/delivery: Ordinary tax on current share value
• At sale: Long-term capital gains tax on gain if held for 1 year past vesting, ordinary tax otherwise (including immediate sale)

When an employee receives shares, he or she is taxed on the value at that specific time. This means you may have to write a check to the company to cover your income and employment tax withholding. Often, for U.S. employees, companies will withhold the tax in the form of shares such that no action is required by the employee at vesting time.

If you receive an RSU when the stock is of little value, you cannot elect to be taxed on the value of that stock when you receive the RSU — you pay taxes at vesting time, based on the value of the shares at that time.

RSUs present some big problems in private companies:

• You can’t minimize the tax impact of an increase in value of the underlying shares between the date you receive the RSU and the date it is settled.
• You will owe tax when you receive the shares, even though they are illiquid.
• If you are an employee you will have to write a check to the company to satisfy your income and employment tax withholding.

RSUs are less attractive than stock options from a tax point of view because you cannot make an 83(b) election with respect to RSUs. By contrast, if you receive a stock option, as long as it’s priced at fair market value you will have no income upon receipt of the options, and your income tax and employment tax consequences will be deferred until you exercise, an event under your control for the most part.