Your Guide to California's RSU Tax Rate

At tech giants like Google and Meta (Facebook), Restricted stock units (RSUs) are a crucial part of your compensation package. To maximize the value you get from your RSUs, you need to know their value and how much you’re projected to earn from them, but that’s not all. For tech employees located in California, understanding the RSU tax rate in California is a crucial piece of the puzzle, too.

How much you can expect to pay in taxes on your RSUs in California in this comprehensive guide? Let’s dive in.

RSU Tax Rates in California

Employees who negotiate for RSUs as part of their compensation will not face taxes on them as soon as their employment begins. Instead, these units are taxed as income when they vest. 

In most major companies, your RSUs will vest according to a schedule spread out over a span of a few years, giving you incentive to stay with the company for longer to see your full financial gains realized. The vesting schedule is different between California-based tech giants like Meta/Facebook RSUs and Google RSUs, so take some time to figure out your schedule and how close you are to vesting. This may also apply to you if you have Amazon RSUs or Microsoft RSUs but you are based in California.

In addition, you will also need to pay capital gains tax if the share price has gone up since the day that they vested. California has unique rules when it comes to capital gains in that they do not differentiate between short-term (stock sold that is held less than one year) and long-term (stock sold that is held more than one year) capital gains. Instead, they are all taxed at your regular state income rate. 

While California may have benefits when it comes to your RSU taxes, keep in mind that federal taxes are separate from California’s state-specific supplemental taxes. Your employer will withhold anywhere from 22 percent to 37 percent depending on your wages, in addition to California’s mandatory state taxes set at 10.23 percent.

How Does the California Tax Rate Affect Remote Workers?

While major tech giants like Facebook and Google are based in California, their workers are spread out all over the country. Remote and non-resident workers need to know the tax rate that their RSUs will fall into based on their residency.

First, it’s important to understand how residency is defined in the state of California. Residency is determined by a variety of factors, including how much time you spend in California, the location of your principle residence, where you are registered to vote and drive, and many more.

In short, residency is based on the strength of your ties to California compared to other states. A trip to visit family or a vacation home in California does not necessarily classify you as a resident, even if you visit often. 

When determining your RSU tax rate for California, the state looks at how much time you worked in California between the day your RSUs were granted and the day that they vested. The percent of time that you worked in California is the amount of your earnings that is subject to California taxes.

Example #1: Entirely Non-Resident 

Suppose your company is based in California, but you are an Arizona resident that lives and works entirely in Arizona. If you did not work any days in California during your entire RSU’s vesting period, none of your income from the RSU is taxable by California. 

Example #2: Partial Resident and Partial Non-Resident

Suppose your RSUs were granted while you lived and worked in California. After two years in California, you moved out of state to work remotely for the next two years until your RSUs vest. If you worked 600 workdays in California and and 400 workdays in other states during your RSU’s vesting period, 60 percent of your income from the RSU is taxable by California. 

When Are Taxes Due? 

You might be surprised to learn that taxes are due relatively quickly when your RSUs vest. The company that you work for will withhold taxes on the vesting date to help offset what you would owe on your taxes at the end of the calendar year. In this scenario, they withhold at least the default of 22 percent for federal income taxes.

However, you may still owe additional funds on your RSUs at the end of the year if you are a high-income individual. 

Federal income taxes are due on April 15 of the following year. If you are subject to additional taxes, it may be beneficial to consult with a financial professional to discuss paying estimated taxes before this final deadline. 

Tips for Reducing Your RSU Tax Rate in California

The good news is that you can reduce your RSU tax rate in California to make the most of your RSU compensation. Many tech professionals who receive RSUs do not take advantage of these opportunities, and they’re missing out on great ways to save. 

First, you can adjust your withholding so that your W-2 reflects a higher withholding at the end of the tax year. This cuts back on interest and penalties that you could be charged by the IRS for not paying the full balance of your taxes. Your HR department or stock department can help you find where to change this, both for your paycheck and for your vesting stock. 

You can also sell your stock immediately upon vesting to minimize capital gains taxes. While some of the shares will be automatically sold to cover your federal tax withholding, others are deposited into your stock account. On the day it vests, the stock establishes its cost basis. Before it has the chance to go up or down, you can sell and avoid capital gains tax because there have been no gains on the RSUs. 

Other ways to reduce your RSU tax rate in California include maxing out tax-deductible accounts like a 401(k) or a health savings account (HSA). You can even make a sizable charitable contribution to offset your earnings. 

Understand how RSUs and stock compensation impacts your financial planning and start to make a clear path forward for your financial future. 

Have Questions about Your RSU Tax Responsibilities? 

You worked hard for your compensation package – it only makes sense to maximize the value you get from your RSUs and other benefits. 

If dealing with the various tax rates leaves you with questions, reach out to a fiduciary and wealth planning group like Consilio Wealth Advisors. We’ll show you the ropes and help you understand this and so much more.

Schedule a call with us today to see how we can guide you toward making savvy financial decisions. 

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