RSU Tax Strategy

Restricted stock unit compensation is commonplace for our clients, specifically those in technology. I will not get into specifics, but here is a rough synopsis of how RSU taxation works:

• Your employer will hire you & provide a compensation package that reads somewhat like this: “you will receive $500,000 in base compensation and $2,000,000 in equity – four year vest with a one-year cliff.” What does this actually mean?
• This means that the first year, you will be earning only your base compensation. Each year thereafter, you will be granted shares that vest. The fair market value of the shares at the date of the vest becomes your “cost basis” in the shares. This amount is added to your W2 as compensation & a portion of the shares are “sold to cover.”
• In our example, each year, you will vest $500,000 in equity at the fair market value at the time of vest, which may have changed from the amount at the time you joined your employer. In some cases, this amount has increased substantially.
• Often times, the company sells to cover – this is meant to cover your tax obligation, but is frequently insufficient. Since Social Security Taxes & Medicare Taxes are taken out, the amount of tax withholding may seem large on your pay stub but is normally only 22% for federal, which is insufficient for the higher tax brackets
• For this reason, may taxpayers are caught off guard owning at the end of the year due to RSU compensation with sell-to-cover being insufficient. They frequently say similar things: “How do I owe when my company sold so much of my shares.” They are normally looking at the total amount without considering that the SS and Medicare tax portion (or withholdings for state for our clients in states that have tax) will not contribute toward their actual federal tax obligation
• For this reason and many more, tax planning is important when you are compensated with RSUs

Due to our large technology client base, we are frequently approached with the following questions:

• My company has granted me RSUs – when should I sell them & how much should I set aside for tax purposes?
• They “sell-to-cover” my shares – will this be sufficient to cover my tax?
• Are there any tax-saving strategies for me available in these situations?
• Should I then sell the underlying equity as soon as it is granted? How many share should I sell?
• How will my strategies be affected by share price and possible fluctuations?
• Should I make estimated tax payments, and if so, how much?
• How are the states affected?
• Can I construct a plan for more than one year of equity vesting, exercises, and sales?

These (and more) are all common scenarios that we compute for the clients.

Contact us at hello@dimovtax.com if you would like to get started with an analysis or to book a consultation to discuss strategy.