Why are Restricted Stock Units (RSUs) so tricky when it comes to taxes?
The difference between how your RSUs are taxed when they are received and later sold can create some confusion and common mistakes when it comes to RSUs and your taxes.
So how are RSUs taxed? The short answer is in a few different ways:
Ordinary Income (On your W-2)
RSUs are considered an additional form of compensation and taxed differently than your salary, but reported on the same form. When RSUs vest they are taxed at the set supplemental withholding rate of 22% (or 37% for supplemental income levels over $1 million) and reported on your W-2. When you earn your salary your employer withholds federal taxes from your paycheck according to your instructions (how you filled out your W-4). Your salary is also reported on your W-2.
The exception to W-2 reporting is when you are not an employee of the company. For example, if you hold a director position then income is reported on a 1099-MISC.
When you sell your RSUs they could be subject to long-term capital gains tax if held for a year after the vesting date. The capital gains rate you pay (either 0%,15%, or 20%) depends on your taxable income. It’s important to note that your capital gains holding period begins at vesting and not when you are granted the shares.
An important figure to know is your cost basis or what you acquired the stock for. This is used to determine the amount of your gain, which is the portion that is subject to the rates listed above. Your cost basis in the stock will be the amount of compensation income you received at vesting. When you sell stock this will be reported on Form 1099-B which comes from your brokerage company.
What Forms are Needed?
When it comes to tax time, make sure you have the following forms handy in order to complete your return: W-2, 1099-MISC (if applicable), and 1099-B. Stock sales will be reported on Forms 8949 and Schedule D of your return.
The actual process of filing your return can be a little tricky since income may fall into several different categories. As always, if things get too complex consult your tax advisor.
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Christine Centeno, CFPⓇ, MS is the founder of Simplicity Wealth Management. She has over 12 years of industry experience as a financial advisor and is a member of several professional organizations including NAPFA, FPA, and the XY Planning Network. She also holds her Masters in Financial Planning. In 2019, after years of working for large firms, she founded her own firm. Simplicity Wealth Management provides clarity to the complicated nature of financial planning and investing by delivering comprehensive advice without hidden fees and unnecessary jargon that leaves you in the dark. The goal is to deliver transparent, easy-to-understand guidance to help clients achieve their financial goals and remain informed every step of the way.
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