2. ALPHA B GROUP 1
Restricted Stock Units (RSU):
Explaining them in a way without all the tax jargon and IRS codes.
What are Restricted Stock Units?
They are stocks that are given to you once you meet certain time lines - such as yearly work
anniversaries. This is used to encourage you to stay at least 1 full year to get stocks. If you leave
before the date you’re supposed to receive the stock, you don’t receive any of the stocks – not even
prorated. Usually RSUs have a schedule that indicates on what day you will receive a certain amount
of shares. These schedules vary between different companies.
For a simple example: The company will allow you to receive 2,000 shares over 4 years but you only
get 25% for each full year met. That means every year you will receive 500 shares for 4 years.
Advice: If you plan to leave the company, look at the schedule to see if you're close to getting the
next round of RSUs. If so, it may be worth to wait a little longer before leaving.
1st Year
500 Shares
2nd Year
500 Shares
3rd Year
500 Shares
4th Year
500 Shares
Four Year Vesting Schedule
3. ALPHA B GROUP 2
When do I pay taxes?
For RSUs, you will automatically receive stocks deposited into your brokerage account when you
reach specific dates. Once you received the stocks you can choose to hold or sell. The problem is
that no matter what you choose, you are paying taxes on the price of the stock when you received it.
The IRS considers this taxable income because you essentially received something and you have the
choice to sell it. Also, most people choose the option to have the company automatically sell a
portion of the total shares they received to pay for the taxes. For those living in the Silicon Valley and
working at big tech firms (Facebook, Google, Apple, LinkedIn), the normal percentage breakdown is:
25% goes to Federal income tax
10% goes to CA income tax
***1%-8% for Social Security/Medicare*** this ranges depending on limitation. For simplicity,
I’m not accounting for it.
The example below is when a portion of the stocks received is sold to cover taxes:
You are receiving 500 shares.
Each share is valued at $100, making the total value received $50,000.
125 shares is sold to cover Federal tax rate of 25%.
50 shares is sold to cover CA tax rate of 10%.
This leaves you with 325 shares.
4. ALPHA B GROUP 3
How do you pay the least amount of taxes?
Because you have already paid taxes on the value of the stock at the time you received it, your stock
basis is that same value. So if you received the stock when the stock price was $100 per share, you
have ordinary income of $100 per share and is already included in your wage income. If you sell at
$120 per share, you would then pay taxes on the delta between $100 and $120 = $20 gain per
share.
Here is an example:
You received 500 shares at
$100/share. Total value is
$50,000 which is
automatically taxed as
ordinary income shown as
wages.
If you sell all 500 shares
when the stock is now
valued at $120/share, your
capital gains is $20/share
which amounts to $10,000
taxable gain reported as
stock sale on your tax
return.
The best way to save on taxes in this situation is if the stock qualified for long-term gains. Long-term
gains is taxed at a lower tax rate BUT you have to hold it for more than 1 year. You have to weigh
the risk factor if the stock will do well in a year from now. If you feel the stock will stay the same, then
it might be worth it to sell the stock. If stock price increases AND you held it for more than a year, not
only did you make more money but the money you made is also taxed at a lower rate!
The example below shows if you were to hold all shares received over the course of 4 years and sold
it all 6 months after the last batch was received.
Batches from year 1, 2,
and 3 qualify for long-term
gains because they were
held for more than a year.
Batch from year 4 was
recently received and
because it was sold 6
months after, it’s
considered a short-term
gain.
Advice: Usually a good time to sell recently received stock is when the stock happens to be tumbling
and looks like it will continue to do so.
5. ALPHA B GROUP 4
What are the surprises?
The biggest surprise people get is that the RSUs that were received are taxed even if they weren’t
sold. The second biggest surprise is how the withholdings are calculated on the shares received for
Federal taxes. The default for most RSUs tax withholding is that the company will sell 25% to cover
Federal taxes. There would be an issue for people in a higher bracket than 25% because this will
leave a shortage on the tax payment.
For example, your tax bracket is 33% but there was only 25% Federal withholding on the RSUs. This
leaves a shortage of 8% on the RSUs received. When RSUs for the entire year are adding $100,000
to your wage income, this leaves an $8,000 Federal tax shortage. People thought that the stocks
being sold to cover taxes was enough - but was not. Also, because of this additional income from
vesting, a person can be pushed into a higher tax bracket.
Advice: It's important to do estimation and planning throughout the year when receiving RSUs since it
makes a big difference in your tax situation. Doing so allows you to plan ahead, avoid surprises as
well as penalties.
Team members that helped write, illustrate, and produce RSU – Restricted Stock Unit:
Phuc Ly, Enrolled Agent Kai Duong
Managing Partner Tax Associate
phucly@alphabgroup.com kduong@alphabgroup.com
https://www.linkedin.com/in/phucly https://www.linkedin.com/in/kaiduong
Sang Truong Tuong Quach
Tax Associate Intern Tax Associate Intern
sangtruong07@gmail.com tuongquach14@yahoo.com
https://www.linkedin.com/in/sangt https://www.linkedin.com/pub/tuong-quach/ab/482/a72
