RSU Tax Tips: Avoid Double Taxation

tax tax tips May 26, 2024

Restricted Stock Units are a great incentive, but do you know how they affect your taxes? 

Restricted Stock Units ("RSUs") have become a popular form of employee incentive. We have seen an increasing number of tax returns with executives and upper management receiving RSUs as a form of compensation as opposed to cash bonuses.

If you've received RSUs, congratulations! This means you've exceeded expectations at your job.

RSUs have a tax impact when they vest and a separate tax impact when you sell them.  It is important to report each taxable transaction accurately to avoid paying tax twice on the same income!

Tax Implications of Receiving RSUs

When you receive RSUs, you do not receive cash but are taxed based on their cash value at the time they vest.

For example, if the value of the RSUs is $5,000 (500 shares at $10 per share), you'll pay taxes as if you've received $5,000 in cash. This occurs even though no actual cash is deposited into your bank account.

Taxes now, cash later? 

You read that right.  See below how companies help you manage this dilemma by liquidating some of your RSUs at vesting to cover tax withholdings. 

When do RSUs turn into cash?

When your RSUs hit your brokerage account, you can sell them... and convert this restricted stock into cash in your pocket.

Selling RSUs is a separate taxable transaction and typically results in capital gains or losses.  The misreporting of the sale of the RSU is the greatest cause of errors on tax returns with RSUs... resulting in you overpaying your taxes.  

How RSU Grants Are Taxed

RSU grants are considered income by the IRS when they vest, even though RSUs are stock and not don't receive any cash immediately.

What does it mean for your RSUs to vest? —meaning you've met certain conditions like staying at the company for a specified time or achieving specific goals—they are yours, and that's when you're taxed.

Let's say you were granted RSUs but then you left the company and those RSUs did not vest, they were never earned and never became yours.  In this case, you did not receive the compensation, so no tax is incurred on unvested RSUs.

How Taxes Are Handled Without Receiving Cash

Are you expected to write a check for taxes with no money from the stock? Not exactly...your company steps in to help.

Companies handle this by withholding or selling a portion of your RSU shares to cover your taxes.

For example, if you are awarded 107 shares and 7 shares' worth is needed to cover the tax withholding, the company will withhold or sell these 7 shares to cover the amount they remit in taxes on your behalf to the IRS and State, leaving you with 100 shares.

Note that the amount of taxes withheld is based on a company-directed tax rate. Federal withholding rates range between 20-25%. This is what they withhold and pay for you. Note that withholdings are only an estimate of the tax you will owe. 

If you are in a higher tax bracket than your withholding rate, you could have to pay taxes on RSUs before you ever sold any.

How much? depends on your personal tax situation.

Your W-2 will report both the income (i.e. cash value of the RSU) received and the taxes withheld.  This will all be part of your individual tax return...and W2s are only one aspect of your tax situation for that tax year.  If your spouse has income, you have retirement, pension payouts, business income and/or rental income, this all plays into your tax filing.

Your actual taxes due are calculated at filing when all income is accounted for as well as all withholdings....and can be offset by deductions and credits.   

Managing Your RSUs

Once your RSUs vest, they are often managed through a brokerage or another platform provided by your employer. This interface allows you to view and manage your grants, vesting schedules, and other stock information.

Selling Your RSUs and Understanding Capital Gains

When You Pay Additional Taxes on the Sale of Stock

When you eventually sell your RSUs, you might pay capital gains tax if the selling price differs from the price at vesting. For example, if the per share price appreciates from $50 to $55, you pay capital gains tax on the $5 increase per share.

The opposite is true if the price declines. If you sell when the price is below the value you received it at, let's say you sell at $42 and it was $50 per share when you received it. You will have a capital loss of $7 per share sold.

The length of time you hold the shares after vesting determines whether these are taxed at short-term or long-term capital gain rates. 

Avoiding Double Taxation

!!! Common Reporting Mistakes

Employers typically get the upfront RSU grant reporting correct on W2s.  However, the sales side of the RSU is very commonly misreported! The gain can easily be overreported on a tax return due to how brokerage statements report it.

Many times...most of the time, the original brokerage statement shows a selling price for an RSU and $0 for the cost.  

This is not accurate. Your cost is the value of compensation that was reported on your W2.  Your cost is not $0 even though you did not pay any cash out of pocket to acquire it.

It's crucial to ensure that your RSUs are correctly reported on your tax return to avoid double taxation.

You pay income taxes on the value of RSU grants in the tax year in which they vest. This is your cost basis in your RSUs.

Adjustments by Brokerages

Almost every brokerage reports the original sale of RSUs as $0 cost.  How they adjust it, differs by brokerage.

Some brokerage statements will adjust the cost on their original report...and some will issue a Supplement to adjust the cost.  Sometimes, it is missed altogether and your tax preparer will be adjusting it for you.

Reporting it as-is on the original brokerage statement almost always will lead to you paying tax TWICE on the same income.

We see and amend many self-prepared tax returns that come across our desk with large capital gains on $0 cost RSU stock sales. 

Identifying the $0 cost error is one step in the process. Tracking it back to the correct RSU can get a bit more in-depth when you have various RSU grants over multiple tax periods.

The Importance of Professional Tax Advice

It's time to hire a tax expert!

Hire a professional for your taxes…one that knows RSUs. (Note that all tax professionals have the same expertise!)  

Choosing an experienced professional over self-preparation can prevent costly errors, potentially saving you $$$ in taxes.

Like many things in life, you get what you pay for. The IRS makes sure you also pay for what you get... hire a tax professional so that you don't pay for it twice.



Need help from a CPA with your taxes, business setup or tax strategy? Send us an email at [email protected] or book a call.

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Julie Merrill is a Certified Public Accountant, business and tax strategist and has over 25 years of experience working in large to small companies. She currently owns and runs her own tax practice.

Disclaimer:  The information provided in this post is for information purposes only and is in no way intended to be tax or legal advice.  For personalized tax and legal advice, seek counsel with your legal team or tax advisor.