How to change your tax election (aka sell to cover) on your Amazon RSUs

Do you have a massive tax bill each year and don't know why? This is likely due to the income tax on your Amazon RSUs being dramatically under withheld upon vest. The default sell to cover rate is 22%, and depending on your level, that is nowhere near enough.

Generally, you can only update this election during an open Amazon trading window. Find out exactly how to change this in four minutes flat.

Transcript:

Are you an Amazon employee that commonly has a large tax bill every year and you don't know why? Congratulations. This probably means that you make enough in stock that the default 22% withholding on your stock is nowhere near enough. This is a great problem.

In this video, we're going to talk about how to change this withholding election so that you cut down on that tax bill at the end of the year. I'm Chris Kaminski, co-founder and partner here with Consilio Wealth, where we specialize in working with technology professionals, specifically at Amazon, Microsoft, Meta, and Google.

Okay, so the first thing is where do you change this? Go to amazonstock.com in your browser. It's going to default to the “at a glance page”. You'll see these tabs at the top. Click stock awards and then you'll see this little US federal tax rate button kind of that's a circular button towards the top right. Click that and then click change US federal tax rate. This is going to pop up a screen that allows you to change by vest, by grant, or you can change all current and future vest. Our recommendation generally is to change all current and future.

That way you don't have to know if the grant that you got a year ago is vesting at one rate. And then the one that you get this coming April is going to vest back at the default rate of 22%. Just change all current and all future. So, you don't have to worry about it. You can always go back in here and update this. You'll notice that right in there, it's going to say 22%. So, elect all current and future and go down and you can make the change.

Note that in order to be able to make this change, assuming you are subject to trading windows, that the trading window has to be open. So, you have about four times throughout the year in order to be able to do this. And also note that since your stock vests two to four times a year, depending on your level, that if you're making this change, say halfway through the year when half of your stock has already vested, the updated withholding might not make that much of a dent in your current year tax bracket.

It's helpful to work with a professional that can help you project out multi-years of your taxes as well as your vests so that you can determine this over a couple of years. Slow plug there.

Let's talk about pros and cons. A main pro is you'll have a smaller tax bill. You also cut down on an underpayment penalty if you've been subject to one of those. Underpayment penalties happen when your withholdings are dramatically lower than what is required to be withheld by the IRS. And then the IRS basically says, hey, you should have paid this throughout the year because you knew you were going to have a tax bill and you didn't. Therefore, they charge you interest from the date at which they determined you owed that tax up until the day that you pay that tax.

Cons are, sometimes we hear from clients that they don't want to adjust their withholdings because their stock always goes up and so they don't want to sell more of it. They'd rather sell more of it later and have a capital gain because they view that as reducing their tax bill. We caution that methodology because the problem is as you continue to progress through the levels at Amazon, you have more and more and more stock compensation, which means you have a bigger and bigger and bigger tax bill. And it's not as simple as just having one vest drop in and you pay your tax bill. It can be a lot more than that.

So we like the idea of at least inching this up over time. A word of caution. We don't try to target hitting your tax bill on the nose, and the reason is if we go through a year like 2022, where many tech stocks came down dramatically, you actually could have too much withholdings because of course your stock is a big component of your income. And so, if you adjusted your withholdings up to try to perfectly hit your tax bill and then your stock went down, which means you would make less money in a future year, you might actually end up over withholding.

The downside of over withholding is that you would sell more shares at a low. And if that stock ultimately starts to recover and covers back to its previous price or anywhere close to it, you basically sold stock at a low to give the government an interest -free loan, and then they gave you back that cash when you filed your return.

So, we don't try to hit your tax bill on the nose, we just try to avoid or minimize under payment penalties, and we try to reduce a big tax bill. Big is relative, everybody has a different pain tolerance for a tax bill, so just understand what is big to you and adjust accordingly to get under that big number. That's it, you now know how to change your withholdings, otherwise known as your sell-to-cover elections as an Amazon employee.