Are RSUs Taxed Twice? What You Need to Know
Many high-income tech professionals at companies like Microsoft, Meta, and Google receive restricted stock units (RSUs) as part of their compensation, ensuring that they will stay with the company long-term until those stock units vest and aligning their work with broad company growth.
Since these are a significant part of your compensation, it's essential to understand how to maximize your benefit! Unfortunately, navigating your compensation package and understanding how taxes will affect your bottom line is rarely a straightforward answer.
So, are RSUs taxed twice? What can you do to alleviate some of the tax burden associated with them? Here is what you need to know to make the most of any RSUs that you might receive from your employer.
Are RSUs Taxed Twice?
RSUs may be subjected to a variety of taxes depending on where you live and when you sell them. In some cases, your RSUs may be taxed twice.
The good news is that you will not owe taxes on your RSUs right away at grant. They do not have any real value until they vest, which can be years down the road depending on the company you work for and if they are public or private. However, they will be taxed as income as soon as they vest.
Let’s take a closer look at how RSU tax liability works.
Suppose that you have 2,000 RSUs that vest this year, with the fair market value of each one being around $50. This makes for $100,000 worth of income that you will be taxed on. If you happen to be in the 32 percent federal tax bracket, you could owe as much as $32,000 in taxes on these vested RSUs.
This RSU income is subject to federal, Social Security, Medicare, state, and local taxes.
Federal Taxes
Of course, your federal tax bracket and exactly what you will owe varies based on your income bracket and filing status. Below you will find 2024 federal income tax brackets for both single filers and those who will file married, filing jointly.
Single Filers for 2024:
|
Tax Rate |
Income Bracket |
Taxes Owed |
|
10% |
$0 - $11,600 |
10% of taxable income |
|
12% |
$11,601 - $47,150 |
$1,160 plus 12% over $11,600 |
|
22% |
$47,151 - $100,525 |
$5,426 plus 22% over $47,150 |
|
24% |
$100,526 - $191,950 |
$17,168.50 plus 24% over $100,525 |
|
32% |
$191,951 - $243,725 |
$39,110.50 plus 32% over $191,950 |
|
35% |
$243,726 - $609,350 |
$55,678.50 plus 35% over $243,725 |
|
37% |
$609,351+ |
$183,647.25 plus 37% over $609,350 |
Married Filing Jointly for 2024:
|
Tax Rate |
Income Bracket |
Taxes Owed |
|
10% |
$0 - $23,200 |
10% of taxable income |
|
12% |
$23,201 - $94,300 |
$2,320 plus 12% over $23,200 |
|
22% |
$94,301 - $201,050 |
$10,852 plus 22% over $94,300 |
|
24% |
$201,051 to $383,900 |
$34,337 plus 24% over $201,050 |
|
32% |
$383,901 to $487,450 |
$78,221 plus 32% over $383,900 |
|
35% |
$487,451 to $731,200 |
$111,357 plus 35% over $487,450 |
|
37% |
$731,201+ |
$196,669.50 + 37% over $731,200 |
Sell-to-Cover
Often, the company you work for will sell a default number of shares at fair market value that will negate your federal tax bill in a move known as sell-to-cover.
The default rate is 22% federal withholding plus applicable Social Security and Medicare taxes. Depending on your tax bracket, this may be nowhere near the amount of tax you actually owe, resulting in a huge tax bill at the end of the year.
Remember that your marginal tax bracket is not the same as your effective rate. Curious about what we mean? Check out this quick tax bracket estimator in the first section of our popular blog post Top 4 Ways to Reduce Taxes on RSU income.
It’s also worth noting that not every company will do this and you may have to plan ahead for how you will pay the federal tax bill out of pocket. In addition, some companies (but not all) allow you to change this default sell-to-cover rate to more closely match your effective tax rate.
Be sure to check with the policies at your company to determine where to make these changes and what restrictions you may have.
State Taxes
In addition to federal taxes, your RSU income is also subject to state taxes, which will depend on where you reside.
For example, Washington’s RSU tax rate includes a new capital gains tax of 7% on gains realized from a long-term asset (RSUs held longer than one year). That being said, there is no state income tax in Washington, so you are in the clear on vest and may be in the clear if you sell quickly (with minimal gain).
From California to New York, every state will have unique RSU tax rules. Be sure to research what you can expect to pay for state taxes in addition to your federal tax bracket.
Capital Gains Taxes
When each RSU is sold, it is taxed as capital gains. Capital gains covers the amount that you have profited on the sale of the stock above and beyond the value that it held when it first vested.
It is worth noting that being taxed twice means you made money twice. In other words, you recognized income upon vest, and then you recognized a capital gain when you sold, assuming the stock went up of course. This is not a bad thing!
Some investors opt to sell their RSUs right away, before they have an opportunity to gain or lose value. It is a savvy way to minimize these capital gains taxes and avoid RSUs being taxed twice. This is particularly true among people who view their unvested RSUs as their “exposure” to their company stock, and therefore prefer to sell their vested shares to reduce concentration risk.
How to Reduce RSU Taxes
Of course, most people who receive RSUs as part of their compensation package want to make the most of this perk and any earned income. Taxes can substantially eat into your profit, but there are a few clever ways that you can minimize your taxes on RSU income.
Sell Right Away
The first and perhaps the easiest way to reduce the taxes is to sell the stock right away. When shares vest for the first time, they are viewed as ordinary income. The company you work for may sell a certain percentage of your shares to cover your federal tax burden on this income in a process known as sell-to-cover (again, the default is 22% for federal tax).
More importantly, the value of the stock you receive has yet to increase or decrease much in value. This means that you will not be subject to capital gains taxes, as the value has not changed from the day that you received it (or the tax will be minimal because the additional gain will be minimal).
Maximize Tax-Deductible Accounts
Another tax planning strategy for high-income earners is to maximize contributions to tax-deductible accounts.
For example, you may contribute the maximum amount to a pre-tax or Roth 401(k) where you may also receive a match from your employer. Other tax-deductible accounts like health savings accounts (HSAs) can also be great vehicles to minimize your tax burden.
Depending on the company you work for, here are some guides for getting more value out of your 401(k):
Other tax planning strategies can include tax-loss harvesting, charitable donations, and 529 contributions. The best path forward will depend on your goals and financial situation, so work with a financial advisor like Consilio who can help maximize what you get from your benefits and compensation package.
RSU Taxation Quick FAQs
Looking for fast answers? While we cover RSU taxation in-depth throughout our article, here are some quick questions and answers you might be looking for around RSUs.
Are RSUs taxed twice?
In some cases, yes. Your RSUs might be taxed once as income and again as capital gains.
How do you avoid double taxation on RSUs?
You can avoid double taxation on RSUs by selling them immediately after they vest. If the fair market value of the stocks is the same on the day they vest and the day you sell, you will not owe capital gains.
Some states, like Washington, do not have a state income tax. Living and working in these states will also enable you to reduce your tax burden.
You cannot avoid RSU taxes entirely, as you will always owe federal income tax on your RSUs.
What is the tax rate on RSUs?
All RSUs are taxed as income. The exact tax rate will depend on your state and federal income tax brackets.
If you don’t sell your RSUs immediately after vesting, you may also owe capital gains tax. Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income and marital status. Read more about the capital gains tax rate on the IRS website.
When do you pay taxes on RSUS?
RSUs only become taxable when they vest, so the exact date you owe taxes will vary depending on your vesting schedule.
How do I find out my RSU vesting schedule?
Each major tech company has its own vesting schedule based on your state date and how many years you’ve been with your company. To help you determine your RSU vesting schedule, check out one of our guides:
Why do I have a large tax bill every year?
We see this a lot with tech professionals like you! The default sell-to-cover rate is 22% for federal tax, but this may not be enough to cover what you owe. If you tend to see a large tax bill during tax season, you likely need to increase your withholding.
Get More Out Of Your Finances With Consilio
You work hard, and you deserve to get the most out of your benefits. At Consilio Wealth Advisors, we work with tech professionals like you to help you get the most out of your unique compensation package, including any RSUs that you are granted.
We specialize in building you a decision framework to sell your shares, whether that’s immediately upon vesting to avoid your RSUs getting taxed twice or later down the road to maximize your earnings. All of this is dependent on your unique financial plan, which is not one size fits all!
Contact us today to learn more and start maximizing your income!
DISCLOSURES:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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