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Tax elections on my RSU vesting: what are my options?

  • 4-min read

Many companies today allow you to choose how you want to cover restricted stock vesting tax withholding … but which option should you choose?

A person feeling overwhelmed by their options in front of many vending machines
Victoriano Izquierdo / Unsplash

Restricted stock units (RSUs) are quickly becoming the favorite choice for companies looking to compensate employees in other ways than just salary, bonus, and other types of stock plans. They entice you to stay at the company longer and make you (hopefully) care how the company’s stock is doing.

Even better for you, there are few choices to make with restricted stock units compared to other types of stock options. If you’ve got incentive stock options (ISOs), you know what I’m talking about. 

What happens when my RSUs vest?

On the date that your shares vest, you’ve got a tax liability. It’s like getting pizza delivery when you’re lactose intolerant: You get to enjoy the cheesy deliciousness now, but you’re going to pay for it later.

Even though the RSUs are taxed at your ordinary income rates, what actually gets withheld for Federal income taxes is a flat 22% and 37% for comp over $1 million (keep in mind Social Security, Medicare, and state taxes are separate).

Depending on where you’re at on the sliding scale of tax brackets, the difference between withholding and actual tax liability explains why it seems your RSUs are taxed so high on your paycheck or why you always seem to owe every year you have a big RSU payout. This is called supplemental wage withholding and keeps many tax planners employed.

So when you’re making this election, know that you aren’t in control of how much gets withheld; you’re just electing how that withholding is covered, which we’ll get into below.

Three options for withholding taxes on RSU vestings

That 22% (or 37%) flat rate has to come from somewhere. If your company lets you choose how they snatch up the withholding, you likely have these three options. 

Withhold shares for taxes

This one’s the easiest and usually the default. The portion of shares that vest goes right to taxes. They never even make their way into your pocket. There are no fractional shares allowed, so what actually gets withheld may end up being more than 22%. Because of course, the simplest option has to have a downside.

If you’ve got restricted stock vs. RSUs, the version of this may be to sell shares to cover the taxes.

Pay taxes with cash

You cough up the cash to the company, they pay the taxes, and you get all the shares that are vesting. Boom.

Take taxes from your paycheck

It’s like the second option, but sadder.

So which should you choose?

If it’s hard enough to pick which banana on the kitchen counter you’re going to eat each morning,  option no. 1 is for you. It’s also a good choice if you think your company sucks and you don’t want any more of their stock (if that’s you, sell all your shares right when they vest to avoid headaches). Same story if you’re low on cash.

How do tough market conditions affect my decision?

This is when options nos. 2 and 3 might be a lot more palatable. If you think the company is ultimately a good buy, but the stock price has been crashing and burning lately, these choices will put more cheap shares in your pocket. This is even more lovely if you’re subject to blackouts or need to get approval to buy additional company shares.

More about the tax implications

A man saying, “Because of the implication.”
Disney / Giphy

Once your shares vest, no matter which option you choose for withholding taxes, be aware that it might not be enough. If you are in a higher tax bracket, then you’ll have to pony up more cash when you go to file your taxes.

Disclosure: Taxes are hella complicated, and this is a very general statement. Find a tax professional who knows equity compensation if you want to be prepared.

The other decision you’ll have to make is whether to keep or sell your shares once they vest. Subject to blackouts, they are yours to do what you want with them. If you decide to hold on to them, you’ll need to hold them at least a year to take advantage of long-term capital gain tax rates. If you sell before a year and the stock has grown in value, then surprise! More taxes. 

Your equity compensation plan provider should have resources available on how to sell restricted stock on their platform.

A pretty easy decision

The good news here is that the default of withholding taxes from shares is pretty straightforward and covers your butt. There are a few limited circumstances where choosing a different option may benefit you more. But for once, laziness here wins out.