Tax Implications of RSUs for Public Technology Companies in California
Restricted Stock Units (RSUs) are a form of equity compensation often used in the technology sector, and they can have significant tax implications for employees. In this comprehensive guide, we’ll break down how RSUs are taxed under federal and state regulations, providing you with the knowledge to plan your finances effectively.
Federal Taxation
Income Tax:
When RSUs vest, they are considered ordinary income. The fair market value (FMV) of the shares at the time of vesting is included in your taxable income. This can be a significant event, especially for high earners, as it can trigger additional payroll and capital gains taxes.
Payroll Taxes:
In addition to income tax, RSUs are also subject to payroll taxes, including Social Security and Medicare taxes. These taxes are withheld at the time of vesting, with a flat rate applied based on federal and state laws.
Capital Gains Tax:
After vesting, any gain or loss from the sale of the shares is subject to capital gains tax. If you hold the shares for more than one year after vesting, you may qualify for long-term capital gains rates, which are typically lower than ordinary income tax rates. However, if you sell the shares within a year of vesting, the capital gains are treated as short-term, and the tax rate may be higher.
California State Taxation
State Income Tax:
California taxes the income from vested RSUs as ordinary income. The state uses a progressive tax rate, so the tax rate will depend on your total income level.
State Capital Gains Tax:
Unlike the federal government, California does not have a separate capital gains tax rate. Instead, capital gains from RSUs are taxed as ordinary income at the same rates as your regular state income tax.
Summary of Tax Implications
At Vesting:
RSUs are taxed as ordinary income for both federal and state purposes.
At Sale:
Any gain or loss from the sale of the shares after vesting is taxed as capital gains, with California treating these gains as ordinary income.
Additional Considerations
Withholding:
Employers often withhold a portion of the shares to cover the taxes owed at vesting, reducing the number of shares you actually receive. This can be a significant amount, especially for high earners.
Tax Planning:
It's advisable to consult with a tax professional to understand the implications of RSUs on your overall tax situation, especially if you are a high-income earner. Tax planning can help you manage your taxes more effectively and avoid unexpected tax bills.
Payment of Federal and CA Taxes on RSU Income:
Payment of federal and California taxes on RSU income occurs in two installments: upfront at vesting and a balance payment by April 15th.
Taxation at Vesting
Taxes Paid at Vest:
At vesting, the IRS and California Franchise Tax Board (FTB) withhold taxes at flat rates. For federal taxes, the withholding rate is 22 and 37 if you exceed $1,000,000 in supplemental wages. For California, the withholding rate is 10.23. If you are a high earner, this withholding may not be enough, and you may need to pay the balance either in a lump sum by April 15th or through estimated taxes throughout the year.
Payment of Federal and CA Capital Gains Taxes upon Sale of Shares
Capital Gains Tax:
After vesting, selling the shares incurs capital gains taxes. The IRS assesses capital gains taxes based on whether the shares were held for more than one year (long-term) or not (short-term). The FTB does not distinguish between short-term and long-term capital gains and applies the standard income tax rate.
Conclusion
Understanding the tax implications of RSUs can help you better plan for the financial impact of equity compensation. It's crucial to work with tax professionals to navigate the complexities of RSU taxation, especially for high-income earners. By doing so, you can minimize your tax burden and maximize the value of your equity benefits.
For more detailed information, you can read my comprehensive blog on RSUs 101, which delves deeper into the intricacies of RSU taxation.