How Your Stock Compensation Gets Taxed

Does your job offer you stock compensation?

Restricted stock units (RSUs) are one of the most common types of equity compensation we see as tax professionals.

RSUs are thought of as a “full value” grant—you receive complete ownership and full value once the vesting period is completed. You don’t have to pay anything like you would with stock options.

So where do the taxes come in? The market value of the RSUs on the vesting date is the amount of taxable compensation to you. The total taxable amount is the market value (stock price) multiplied by the number of shares vested.

For most people, your employer will withhold federal taxes at a flat 22% rate for income taxes along with regular withholdings for Social Security and Medicare taxes. If you’re in a higher tax bracket than 22%, you may need to make extra withholdings or estimated tax payments.

So what happens when you sell your RSUs? It depends on how long you hold them before selling and if you’re selling them at a gain. Your gain is the excess of your sales price over market value when the stock vested.

Gains on sales of shares made within a year of receiving them get taxed at regular income tax rates, while gains on sales made after a year are taxed at lower capital gains rates.

Have questions about your stock compensation? Reach out to schedule a consult meeting.