Understanding your taxable IOUs on your RSUs

If you’re looking to get a job at a MAANG (Meta, Apple, Amazon, Netflix, Google) company, you’ll know that one of the allures of their total compensation package is Restricted Stock Units (RSUs). RSUs are often given as an award at the start of your time at one of these companies, with additional awards given as bonuses as your employment continues. But how does this actually benefit you?

What are RSUs?

RSUs, Restricted Stock Units, represent a form of stock compensation granted by employers to employees. When you’re granted RSUs, you’re given the promise of company stock at a future date. RSUs do not carry voting rights or provide dividends. They are called “restricted” because they are subject to certain conditions, generally a vesting schedule (time waiting to mature to a point that ownership transfers to you) that is tied to the employee’s continuous employment at the company for a specified period. As the company grows and its stock appreciates, RSUs can become highly valuable employee assets. As part of your overall compensation, RSUs serve as a long-term incentive, aligning you with the company’s success and reducing the likelihood of you leaving the company. RSUs can be issued for private or public companies. RSUs are not taxable upon grant but rather only taxable when fully vested. 

Public Company RSUs

When RSUs vest i.e. officially transfer ownership to you, they are considered taxable income at the stock’s Fair Market Value (FMV) on the day of vesting. In addition to being taxable at ordinary income tax rates, because RSUs are considered compensation, they are also subject to FICA taxes (Social Security and Medicare). 

If you are an employee, these vested RSUs will be included on your W2, and the corresponding taxes will be withheld on your behalf—often in a sale to cover the transaction or withheld from transferring to you. 

To understand the mechanics of RSUs, it’s helpful to think of them as if the company issues you a cash bonus, which you then use to buy your company’s stock. Thinking of them this way also helps overcome the fear of missing out when selling the stock upon vesting. While we are not financial advisors and cannot advise you what to do with your finances, many financial experts advise you to sell anywhere from 80-100% (depending on forecasted appreciation of said stock) of your RSUs immediately upon vesting to diversify your portfolio. Since it’s very rare for an employee to receive a cash bonus and elect to use all the funds received to acquire stock in their employer. 

How it breaks down:

Let’s say you are a taxpayer who files as single and has a 2024 salary of $200,000. In November 2024, you have 1,000 RSUs in a company called Public Company A and they vest at a Fair Market Value of $250,000.

Public Company A sells the following number of shares to cover your federal tax withholding obligations (we get into more detail on the ordinary income tax rates used later):

• Your 1,000 Total Shares vested at the end of 2024.
• Public Company A withholds:
  • 220 shares to cover the federal ordinary income tax of 22% on your vested RSUs. 
  • 0 shares to cover social security taxes of 6.2%. Your wages already met the maximum Social Security wage base limit ($168,600 in 2024).
  • 14.5 shares to cover medicare taxes of 1.45% on all wages.
  • 9 shares to cover additional medicare taxes of .9% due on all wages over $200,000 for taxpayers filing as single. 
• In total, 243.5 shares were withheld to cover your withholding tax obligations, and you were left with 756.5 shares of Public Company A, which you are free to hold and sell at a later date, or sell immediately for cash via the broker assigned to handle Public Company A’s stock equity compensation. (Yes, partial shares are common).

As stated above, in effect, Public Company A issued you a stock compensation of $250,000, and after withholding the appropriate taxes, you were left with shares valued at $189,125.

RSUs includable as income are considered supplemental income, similar to year-end bonuses. Be aware that your supplemental withholding rate from your employer at 22% may be less than your federal tax rate of up to 37%. The IRS withholding rate for any supplemental below $1M is 22%, but once the taxable value of your RSUs reaches $1M for the year, the withholding rate jumps to 37% for each dollar in excess of $1M.  This supplemental withholding rate of 22%  can have significant consequences for your tax return, resulting in taxes due when filing.  Here’s why: normally, your wages are withheld at the tax rates in accordance with the IRS progressive tax rate table. This states that 

• Once your wages are over $100,525, your tax rate is 24%
• Once your wages are over $191,950, your tax rate is 32% 
• Resulting in a 10% difference from the supplemental withholding rate! 

How it breaks down:

Let’s use the same scenario as before. Your salary for the year 2024 is $200,000, and you vested $250,000 in RSUs. You also don’t own your home and utilized the IRS standard deduction:

• Based on the IRS tax rate tables (32% tax bracket), your salary would be withheld for $38,400. 
• The income taxes withheld on the vested RSUs would be $55,000 ($250,000 X 22%)—remember, this is also reported on your W2.
• Resulting in the total income taxes being withheld of $93,400.
• However, your tax liability would be about $124,547, and your W-2 reporting wages are underwithheld by $31,147! Not a fun surprise to deal with when filing your tax return. 

Self-Employed? 

If you are an independent contractor, these RSUs will be included on the 1099 that is issued to you by the company and subject to self-employment taxes in addition to ordinary income taxes. Self-employment taxes are the employee portion of FICA taxes (medicare and Social Security – which, as we discussed in our previous example, are 1.45% and 6.2%, respectively. However, since you are your own employer, you are also responsible for paying the employer portion of Medicare and Social Security taxes.

Know the implications of holding or selling your stock

In addition to ordinary income taxes upon vesting, any appreciation in the stock’s value from vesting until sale is subject to capital gains taxes when sold at a later date. The duration of holding the stock determines whether it’s taxed at ordinary rates or capital gains rates. If the stock is held for less than 1 year, the appreciation on the stock from vesting until sale is subject to ordinary tax rates as well as net investment income tax. If held for longer than 1 year, the appreciation on the stock from vesting until sale is subject to capital gains taxes as well as net investment income tax. 

How it breaks down: 

Let’s pretend it is early 2026. More than 1 year has passed since your 1,000 shares in Public Company A vested, and after withholding, you were left with 756.5 shares @ $250 cost basis and a total value of $189,125. 

Your 2026 salary is now at $250,000, and you expect no additional RSUs to vest in 2026.  Your vested shares are now worth $325 each, and you are looking to sell all your shares. 

• You sell all 756.5 shares @ $325 for $245,863 
  • $245,863 – $189,125 (756.5 * $250) = $56,738
  • Resulting in a long-term taxable gain of $56,738 
• Because of your income level, you would pay long-term capital gains taxes at a rate of 15%. 
  • $56,738 x 15% = ~$8,510 in capital gain tax due. 
  • Note: capital gains rates can go as high as 20%.
• You would also pay net investment income tax at a rate of 3.8%, which is applicable to investment income such as interest, dividends, short-term capital gains, and long-term capital gains. 
  • $56,738 x 3.8% = $2,156 investment income tax due. 

However, if you sold those shares with the same appreciation, now valued at $325 per share, before meeting the 1-year holding threshold, they would be taxed as short-term capital gains. 

• Using the current 2024 tax rate tables (note: these tables are subject to change for 2025 on), these gains would be subject to the 35% tax rate, $56,738 x 35% = $19,858.
• Resulting in $11,348 more in taxes, or a 20% tax rate difference, than if you would have held the stock for a minimum of 1 year to meet the long-term capital gains threshold. 

What can you do when all your wealth is tied to one company?

Another way to diversify your vested RSU assets is to leverage an exchange fund to swap your RSUs tax-free for other securities.  

By understanding the taxation of RSUs and leveraging smart strategies, you can minimize tax liabilities while maximizing the benefits of your stock compensation. Whether your RSUs come from a public or private company, staying informed and proactive can help you make the most of this valuable form of compensation.

Any tax advice herein is not intended or written to be used.