How do you pay taxes on restricted stock?
However, RSUs are given for free and only have value after they have vested, differing from
When Are RSUs Taxed? It sounds crazy, but you will pay taxes on RSUs twice, first when they vest and second when you sell them. You have a tax liability initially because the restricted stock units are compensation, so you pay ordinary income tax.
Restricted stock units are considered income once vested, and a portion of the shares is withheld to pay income taxes. The employee then receives the remaining shares and has the right to sell them.
Income in the form of RSUs will typically be listed on the taxpayer's W-2 in the “Other” category (Box 14). Taxpayers will simply translate the figure listed in Box 14 to their federal tax return and, if applicable, state tax return(s).
Tax treatment. Since RSUs are included in W-2 income, the employee is taxed at ordinary (as opposed to capital gain) tax rates on the value of the shares.
Some investors opt to sell their RSUs right away, before they have an opportunity to gain or lose value. It is a savvy way to minimize these capital gains taxes and avoid RSUs being taxed twice.
Long-term capital gains rates are likely the lowest tax on your company shares. In order to minimize your RSU taxes as much as possible, it's typically advisable to hold your shares for at least one year after the vesting date to qualify for long-term capital gains taxes.
Timing of Selling RSUs
Selling RSUs immediately upon vesting is a common approach for many individuals. The reason behind this strategy is to avoid any potential decline in the company's stock value.
Accounting for restricted stock units (RSU's) is very similar to accounting for stock options. The major difference is that valuation is generally much simpler for RSU's, since for non-dividend paying stocks, the RSU is worth the fair value of the underlying stock—no complex option pricing model necessary.
Usually, you'll lose all the RSUs that have not yet vested at the time of your resignation. They'll be forfeited back to the company, and you'll walk away with nothing for those unvested units.
Why are RSUs taxed so high?
RSUs are considered a form of compensation and are included in your taxable income when they vest. Because RSU income is considered supplemental, the withholding rate can vary between 22% and 37%. Usually, your employer will liquidate a percentage of the shares to cover the withholding requirement.
If the RSUs fall into the first or second option, you'll receive a Form 1099-B reporting the total sales proceeds for the number of shares sold. (You may receive a 1099-B for option 3 if you sold any of the shares during the current tax year.)
Tax Implication on Sale of RSU Holdings
If an employee sells his/her RSU holdings, any profit made on that transaction is considered a capital gain. The capital gain is taxable as per its period of holding. The tax is applicable irrespective of whether those shares are listed on the Indian stock exchange.
The company will sell enough shares to cover the taxes that are due on your RSU. If you were granted 100 shares of RSU, you will end up with fewer shares in your account to cover the taxes due on the grant. You can sell it, keep it or do whatever you want, whenever you want.
RSUs: RSUs are generally taxed as ordinary income at the time of vesting based on the fair market value of the shares on that date. Employees are responsible for paying income tax (and employment taxes) on the value of the vested RSUs. Any subsequent capital gains from selling the shares are taxed as capital gains.
Double taxation occurs when taxes are levied twice on a single source of income. Often, this occurs when dividends are taxed. Like individuals, corporations pay taxes on annual earnings. If these corporations later pay out dividends to shareholders, those shareholders may have to pay income tax on them.
For federal taxes, you'll pay capital gains tax on any profit you make from selling your RSUs (the difference between the price you paid for the RSUs and the price you sell them for).
Before the vested shares are actually deposited into a broker account for you by your employer, a certain percentage of your RSU compensation will be withheld for tax purposes. Similarly to a cash bonus, typically about 40% will be withheld for federal, state, local, social security, and medicare taxes.
Once you own a restricted stock unit, you can sell these shares subject to the same rules and conditions as any other share of stock. With a publicly traded company, you can contact your brokerage of choice and sell the shares directly.
When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
How are restricted stock units taxed when vested?
Both restricted stock and RSUs become taxable only when the vesting schedule has been completed. With restricted stock, the full amount of the vested stock has to be taxed as ordinary income in the vesting year.
- The stock price at the Valuation Date;
- The expected volatility of the stock price through the vesting period;
- The taxes payable upon vesting;
- The likelihood of the RSUs vesting; and.
- The time value of money.
Restricted stock (also called letter stock or section 1244 stock) is usually awarded to company directors and other high-level executives, whereas restricted stock units (RSUs) are typically awarded to lower-level employees. Restricted stock tends to have more conditions and restrictions than an RSU.
RSUs are taxed as income to you when they vest. If you sell your shares immediately, there is no capital gain tax, and you only pay ordinary income taxes. If instead, the shares are held beyond the vesting date, any gain (or loss) is taxed as a capital gain (or loss).
The first RSUs would vest according to a time-based schedule, typically 4 years with a 1-year cliff (so ¼ of the shares would become vested after 12 months, and an additional 1/48 of the shares would vest each month after that). This is still the standard schedule.
