**The Ultimate Guide to Restricted Share Units Taxation: Understanding the 80% Rule and Beyond**

Introduction

Restricted share units (RSUs) are a common form of equity compensation granted to employees. They are typically subject to vesting restrictions, meaning that employees must meet certain criteria (such as performance targets or tenure) before they can exercise the units and receive the underlying shares.

The taxation of RSUs is a complex issue that can vary depending on a number of factors, including the type of RSU, the employee's vesting status, and the applicable tax laws. This guide will provide a comprehensive overview of RSU taxation, focusing specifically on the "80% rule" and beyond.

The 80% Rule

The 80% rule is a tax provision that allows employees to defer paying taxes on RSUs until they are vested. Under this rule, employees are taxed on 80% of the fair market value (FMV) of the RSUs when they vest. The remaining 20% is not taxed until the employee sells the shares.

The 80% rule can provide a significant tax savings for employees, especially if the FMV of the RSUs has appreciated significantly since they were granted. However, it is important to note that the 80% rule only applies to certain types of RSUs.

Types of RSUs

There are two main types of RSUs:

• Service-vested RSUs: These RSUs vest based on the employee's length of service with the company.
• Performance-vested RSUs: These RSUs vest based on the employee's achievement of certain performance targets.

The 80% rule only applies to service-vested RSUs. Performance-vested RSUs are taxed in full when they vest, regardless of the FMV of the shares.

Vesting Status

The vesting status of RSUs is also a key factor in determining how they are taxed. There are three main vesting statuses:

• Unvested: The employee has not yet met the criteria to vest the RSUs.
• Vested: The employee has met the criteria to vest the RSUs and can now exercise them.
• Forfeited: The employee has failed to meet the criteria to vest the RSUs and has lost the right to them.

Unvested RSUs are not taxable until they vest. Vested RSUs are subject to the 80% rule or full taxation, depending on the type of RSU. Forfeited RSUs are not taxable.

Taxable Events

There are three main taxable events that can occur with RSUs:

• Vesting: When RSUs vest, the employee is taxed on 80% of the FMV of the shares (or 100% if the RSUs are performance-vested).
• Exercise: When the employee exercises RSUs, they are taxed on the difference between the FMV of the shares and the exercise price.
• Sale: When the employee sells RSUs, they are taxed on the capital gain (or loss) from the sale.

Tax Calculations

The tax calculations for RSUs can be complex, but the following general steps can be used:

1. Determine the type of RSU.
2. Determine the vesting status of the RSU.
3. Calculate the FMV of the shares when the RSU vests.
4. Apply the 80% rule (if applicable) to calculate the amount of income subject to tax.
5. Calculate the amount of tax due.

Tax Forms

The following tax forms are typically used to report RSU income:

• Form W-2: This form reports the employee's wages, salaries, and other compensation, including RSUs.
• Form 1040: This form is used to file individual income tax returns. Line 7 of Form 1040 is used to report RSU income.
• Schedule D: This form is used to report capital gains and losses from the sale of stocks, bonds, and other investments. Schedule D is used to report capital gains from the sale of RSUs.

Tips and Tricks

The following tips and tricks can help employees minimize the tax burden on their RSUs:

• Exercise RSUs in a low-income year. This will reduce the amount of taxes due on the exercise.
• Sell RSUs after they have appreciated in value. This will maximize the capital gains deduction, which can reduce the amount of taxes due on the sale.
• Hold RSUs for long-term capital gains. This will reduce the tax rate on the sale of the shares.

Conclusion

The taxation of RSUs can be a complex issue, but by understanding the 80% rule and other tax rules, employees can minimize the tax burden on their RSUs. This guide provides a comprehensive overview of RSU taxation and can help employees make informed decisions about how to manage their RSUs.

Frequently Asked Questions

Q: What is the 80% rule?
A: The 80% rule is a tax provision that allows employees to defer paying taxes on service-vested RSUs until they are vested.

Q: What is the difference between service-vested and performance-vested RSUs?
A: Service-vested RSUs vest based on the employee's length of service with the company, while performance-vested RSUs vest based on the employee's achievement of certain performance targets.

Q: When are RSUs taxed?
A: RSUs are taxed when they vest, when they are exercised, and when they are sold.

Q: How can I minimize the tax burden on my RSUs?
A: You can minimize the tax burden on your RSUs by exercising them in a low-income year, selling them after they have appreciated in value, and holding them for long-term capital gains.

Tables

Table 1: RSU Types and Taxation

Table 2: Vesting Statuses and Taxation

Table 3: Taxable Events and Taxation

Table 4: Tax Forms for RSUs