RSU Offset Explained: Everything You Need to Know
Understanding your compensation package as a tech professional is fraught with small details that make a big difference. Restricted stock units are a standard part of your compensation, but you may not be prepared for your RSU offset.
Maybe you’ve seen this line item on your pay stub. If it’s thrown you off and made you wonder what it means, Consilio can help you get to the bottom of it. This comprehensive guide will walk you through what RSU offset means for your paycheck and how you can minimize tax liability with restricted stock units.
What is an RSU Offset?
Have you ever sat down and really examined your paystubs? If so, you might have noticed a little line item known as your “RSU offset” and wondered what it meant.
An RSU offset is simply a payroll adjustment that accounts for the value of your restricted stock units so the company accurately reports your pay.
More to the point, your payroll department wants to ensure you have the funds available to cover the cost when those RSUs vest. After all, those restricted stock units are a part of your taxable income once they vest. An offset typically means your employer is selling some of your shares to cover your tax, Social Security, and Medicare withholdings.
The amount they sell depends primarily on your sell-to-cover election. Many companies default to a 22% withholding, but allow you to increase this based on your preference. We recommend reviewing your income and withholding with a tax advisor or financial planner to ensure the proper amount is withheld.
How are RSUs Taxed?
The sticking point for many people is that they don’t really understand how RSUs are taxed. The process is relatively simple, as the value of the shares at vest is treated as earned income, and any subsequent movement leads to a capital gain (or loss) when the shares are sold. This means that your RSUs may indeed be taxed twice if you wait to tap into their value after vesting.
This is why many people will sell their RSUs immediately so they don’t have a chance to increase in value and be penalized with capital gains. Depending on which state you call home, you may also be subject to state taxes that function in a similar manner to federal taxation.
Here’s a quick look at the RSUs vesting schedule for some major tech companies:
3 Quick Tips to Reduce Your RSU Tax Liability
If you’re worried about what your vested restricted stock units will do to your taxes at the end of the tax year, you can make a few savvy decisions right now to minimize out-of-pocket spending later. Here are a few tips to minimize RSU tax liability.
Adjust Tax Withholding
The first thing to do is ensure you’re accounting for the proper tax withholding. As mentioned above, many companies that often give RSUs as part of a comprehensive compensation package default to a 22% withholding rate for federal taxes. Modifying your sell-to-cover amounts with HR or the stock plan department may be a simple adjustment.
Sell Right Away
As mentioned earlier, one way to minimize tax liability is to sell your stocks right away before they have a chance to increase in value. While you may miss out on tremendous growth if you work for a company that is doing well, you also avoid capital gains taxes if you pay attention to the exact timing of your vested RSUs. This allows them to be taxed as ordinary income without profit or loss cutting into your earnings.
Maximize Tax Deductions
Another tactic to reduce RSU liability is maximizing available tax-deductible accounts with your accountant or HR department. For example, you may contribute the maximum amounts to a pre-tax 401(k) or a health savings account. These accounts allow you to plan for the future while also benefiting in the here and now. It’s a win-win situation all the way around.
Lean on Consilio to Make Sense of Your Compensation
You work hard – it only makes sense that you understand and make the most of what you’re owed. Consilio Wealth Advisors acts as both a fiduciary and a wealth planning group that can help tech professionals like you understand what you earn, how you’re taxed, and what it means for your bottom line.
After working with so many tech professionals, the experts at Consilio have seen it all: the misunderstandings, the mistakes, and the near-misses that keep you from claiming every dollar you deserve. That’s why we designed an in-depth library of free guides and resources for tech employees to help you optimize your RSU strategy and make the most of your compensation.
Reach out to us today to learn more about our services and how we can help you build and manage wealth!
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