Taxation of Restricted Stock Units: A Comprehensive Guide

Introduction

Restricted stock units (RSUs) are a form of equity-based compensation that has gained popularity among companies as a way to attract and retain employees. RSUs are taxable in two phases: when they are vested and when they are sold. Understanding the taxation of RSUs is crucial for employees who receive them as part of their compensation package.

Phase 1: Taxation at Vesting

At the time of vesting, RSUs are typically subject to the following taxes:

• Ordinary Income Tax: The value of vested RSUs is taxed as ordinary income at the employee's marginal tax rate. This rate ranges from 10% to 37%, depending on the employee's income bracket.
• Payroll Taxes: Vested RSUs are also subject to payroll taxes, including Social Security (6.2%) and Medicare (1.45%).

Example: If an employee receives 1,000 vested RSUs with a share price of $100, they will be taxed on $100,000 (1,000 x $100). Assuming a marginal tax rate of 24%, the employee will pay $24,000 in federal income taxes and $6,200 in payroll taxes.

Phase 2: Taxation at Sale

When the vested RSUs are sold, the proceeds are subject to capital gains tax. The tax rate depends on the holding period of the RSU shares sold:

• Short-Term Capital Gains Tax: If the RSU shares are held for less than one year, the proceeds are taxed as short-term capital gains at the employee's ordinary income tax rate.
• Long-Term Capital Gains Tax: If the RSU shares are held for more than one year, the proceeds are taxed as long-term capital gains at a lower rate:
  • 0% for taxpayers in the 0% to 10% tax brackets
  • 15% for taxpayers in the 10% to 40.8% tax brackets
  • 20% for taxpayers in the 40.8% to 50% tax brackets

Tax Deferral Options

In some cases, employees may be able to defer taxation on RSUs until a later date. The two main tax deferral options are:

• Qualified Employee Stock Purchase Plan (ESPP): Employees can purchase company stock at a discount under an ESPP. Taxes on the discounted shares are deferred until the shares are sold.
• 401(k) and 403(b) Plans: Employees can contribute a portion of their RSUs to these retirement plans before taxes. The taxes are deferred until the funds are withdrawn in retirement.

Table 1: Effective Tax Rates on RSUs

Table 2: Tax Savings from Deferral Options

Table 3: IRS Reporting Requirements

Conclusion

Taxation of RSUs is a complex issue that requires careful planning and consideration. Employees who receive RSUs should consult with a tax professional to determine the best tax strategies for their individual circumstances. Understanding the tax implications can help employees maximize their after-tax收益 and minimize their tax burden.