Key Points
- RSUs are a form of equity compensation granted to employees that give them a contractual right to receive shares of company stock at a future date, typically upon the vesting date.
- RSUs are subject to ordinary income taxes and tax withholding based on the value of the shares at the time of vesting. The tax rate on RSUs can vary depending on the employee’s tax bracket.
- Tax deferral allows an employee to delay paying taxes on their RSUs until a later date, reducing their tax liability. However, there are also drawbacks to tax deferral, such as the limited ability to control the timing of tax payments and the risk of loss if the stock price decreases.
- To maximize tax deferral with RSUs, an employee needs to plan ahead and understand the deferral period and eligibility requirements. They can also take advantage of nonqualified deferred compensation plans, depending on their eligibility.
- Strategies for RSU tax planning include planning for RSUs before and after they vest, considering the impact of RSUs and company stock on overall tax planning, and working with a tax or financial advisor to maximize tax benefits.
Introduction to How To Defer Taxes on RSUs
If you are a key employee in a corporation, you may have been awarded restricted stock units (RSUs) as part of your compensation package. RSUs are a form of equity compensation that can be valuable but also complex when it comes to tax planning. As an expert in wealth management and tax planning, I am here to guide you through the intricacies of RSUs and help you understand how to defer taxes on them.
In this article, we will cover everything you need to know about RSUs and tax planning. We will start with an explanation of what RSUs are and why they are important, followed by an overview of the article. We will then dive into the tax consequences of RSUs and how you can defer taxes on them. Additionally, we will discuss strategies for RSU tax planning, including planning for RSUs and company stock, as well as RSUs and liquidity events. Finally, we will touch on other considerations for RSUs, such as the impact of the Jobs Act and legal considerations.
By the end of this article, you will have a comprehensive understanding of how to navigate the tax implications of RSUs and how to maximize their benefits. Let’s get started with the basics.
I. Summary Of Key Points:
- RSUs are taxed at ordinary income tax rates when they vest. This means that if you have $200,000 in Restricted Stock that vests all at once, your ordinary income for the year will be your salary + $200,000.
- The main options you have to defer taxes on RSUs include maximizing contributions to pretax accounts such as your 401k, HSA, FSA, Dependence Care FSA, Deferred Compensation Plan and IRAs (eligibility depends on your income and the accessibility of an ERISA-qualified plan such as a 401k).
- If you’re not thoughtful about your strategy to minimize your taxes as your stock vests, you could end up with a potentially unaffordable tax bill. Don’t have a tax plan based on a “hope”; be thoughtful.
II. Understanding RSUs:
Restricted stock units (RSUs) are a form of equity compensation that are granted to employees by their employer. They represent a contractual right to receive shares of company stock at a future date, typically upon the vesting date. RSUs are different from stock options in that they do not give the holder the right to purchase shares of stock at a strike price, but instead provide the holder with actual stock shares.
RSUs work by vesting over a period of time, during which the employee must remain with the company. Once the RSUs vest, the employee receives the shares of stock or their cash value. Key terms related to RSUs include the grant date, vesting period, vesting date, value of the shares, and the fair market value of the stock at the time of the grant.
III. Tax Consequences of RSUs:
The taxation of RSUs is based on the value of the shares at the time of vesting. RSUs are subject to ordinary income taxes and tax withholding, which is typically based on the total taxable income of the employee in the calendar year. The tax rate on RSUs can vary depending on the employee’s tax bracket, with higher earners subject to higher tax rates.
To calculate the tax on RSUs, you need to determine the amount of income the RSUs represent and the applicable tax rate. Different types of RSUs have different tax consequences, such as incentive stock options (ISOs) and qualified equity grants (QEGs), which may be subject to different tax rates and rules under the Internal Revenue Code (IRC) Section 83.
IV. Deferring Taxes on RSUs:
Tax deferral allows you to delay paying taxes on your RSUs until a later date, potentially reducing your tax liability. To defer taxes on RSUs, you need to follow specific rules and meet eligibility requirements. The benefits of tax deferral include increased cash flow and the ability to invest the deferred tax amount. However, there are also drawbacks to tax deferral, such as the limited ability to control the timing of tax payments and the risk of loss if the stock price decreases.
To maximize tax deferral with RSUs, you need to plan ahead and understand the deferral period and eligibility requirements. RSUs may be eligible for nonqualified deferred compensation plans, which allow for deferred taxation until a later year. Eligibility for tax deferral may depend on factors such as your status as a qualified employee and the type of RSUs you hold.
V. Strategies for RSU Tax Planning:
There are several strategies for RSU tax planning, including planning for RSUs before and after they vest. Planning for RSUs before they vest can involve maximizing fringe benefits, taking advantage of company stock purchase plans, and considering the impact of different types of RSUs on overall tax planning. Planning for RSUs after they vest can involve timing the sale of RSUs to minimize tax consequences and considering the impact of RSUs on social security taxes.
Working with a tax advisor or financial advisor can be helpful for RSU tax planning, as they can provide expert advice on strategies for deferring taxes and maximizing tax benefits.
VI. RSUs and Company Stock:
RSUs and company stock often work together in compensation packages, and it is important to understand the impact of both on your overall tax planning. The performance of the company can impact the value of RSUs and company stock, and there may be tax consequences associated with both. Planning for company stock and RSUs together can involve considering the timing of sales, tax deferral strategies, and the impact on social security taxes.
VII. RSUs and Liquidity Events
A. What is a liquidity event?
A liquidity event refers to a significant change in a company’s financial circumstances, such as an initial public offering (IPO), merger, acquisition, or sale. These events typically result in a substantial increase in the value of the company’s stock.
B. Impact of liquidity events on RSUs
RSUs are often granted to key employees as part of their compensation package. When a liquidity event occurs, the value of the company’s stock can increase significantly, which can have a significant impact on the RSU holder’s tax liability.
C. Strategies for RSU tax planning during a liquidity event
One strategy for RSU tax planning during a liquidity event is to sell the RSU shares immediately upon vesting. This can help the holder realize any capital gains and avoid any potential tax implications associated with holding onto the shares.
Another strategy is to delay the sale of RSU shares until a later date. This can help the holder avoid immediate tax liabilities and potentially benefit from future stock price increases. However, it is important to consider the potential risks associated with holding onto the shares, including the risk of loss if the stock price decreases.
It is also important to consult with a tax advisor or financial advisor to fully understand the potential tax implications of a liquidity event and develop an appropriate tax planning strategy.
VIII. RSUs and Fringe Benefits
A. Definition of fringe benefits
Fringe benefits are additional benefits or perks offered by an employer in addition to a salary or wages. These benefits can include things like health insurance, retirement plans, and stock-based compensation.
B. How RSUs can be a fringe benefit
RSUs can be offered by employers as a fringe benefit to key employees. These RSUs typically vest over time, and the holder can sell the shares at a later date to realize any potential gains.
C. Tax consequences of RSUs as a fringe benefit
RSUs granted as a fringe benefit are subject to ordinary income taxes at the time of vesting, based on the fair market value of the shares at that time. Any subsequent gains or losses from the sale of the shares will be subject to capital gains taxes.
D. Planning for RSUs as a fringe benefit
When planning for RSUs as a fringe benefit, it is important to consider the potential tax implications and develop a tax planning strategy accordingly. This may involve selling the shares upon vesting or delaying the sale of the shares until a later date.
It is also important to consult with a tax advisor or financial advisor to fully understand the potential tax consequences and develop an appropriate tax planning strategy.
IX. Other Considerations for RSUs
A. Key differences between RSUs and other forms of equity compensation
One key difference between RSUs and other forms of equity compensation, such as incentive stock options, is that RSUs do not involve the purchase of actual stock. Instead, RSUs represent a contractual right to receive a certain number of shares of stock at a future date.
B. Different rules for RSUs for private companies and public companies
The rules governing RSUs can differ for private companies and public companies. For example, RSUs granted by private companies may be subject to restrictions on the sale of the shares, while RSUs granted by public companies may have voting rights attached to them.
C. Impact of the Jobs Act on RSUs
The Jobs Act, passed in 2012, includes provisions that allow for certain types of equity compensation, including RSUs, to be offered to employees of eligible corporations without triggering federal registration requirements.
D. Legal considerations for RSUs
When implementing an RSU plan, it is important to consider any legal requirements and consult with legal counsel as needed. This may include compliance with the Internal Revenue Code (IRC) Section
IX. Other Considerations for RSUs
A. Key differences between RSUs and other forms of equity compensation
While RSUs are similar to other forms of equity compensation, such as incentive stock options, there are some key differences to be aware of. For example, RSUs do not give the holder the right to purchase stock at a specific strike price, as is the case with options. Instead, RSUs are simply a promise to deliver a certain number of shares of stock at a future date.
B. Different rules for RSUs for private companies and public companies
The rules surrounding RSUs can vary depending on whether the company is private or public. In general, private companies have more flexibility when it comes to granting RSUs, as they are not subject to the same regulatory requirements as public companies. For example, private companies may be able to grant RSUs with a lower fair market value than public companies, as there is no public market to establish the value of the shares.
C. Impact of the Jobs Act on RSUs
The Jobs Act, which was passed in 2012, made it easier for companies to offer equity compensation to their employees, including RSUs. One of the key provisions of the Jobs Act was the creation of a new type of equity grant known as a qualified equity grant (QEG). QEGs are designed to be simpler and more flexible than traditional equity grants, and they offer certain tax advantages to employees.
D. Legal considerations for RSUs
There are a number of legal considerations that companies need to be aware of when granting RSUs. For example, companies need to ensure that they are complying with all applicable regulations, such as the Internal Revenue Code (IRC) and state securities laws. In addition, companies need to have a clear understanding of the terms and conditions of the RSU grants, and they need to ensure that they are being transparent with their employees about the risks and benefits of the grants.
E. Other tax implications of RSUs
In addition to the tax implications discussed earlier in this article, there are a number of other tax considerations that can come into play when dealing with RSUs. For example, if an RSU holder dies before the shares are delivered, the value of the shares may be subject to estate tax. Similarly, if an RSU holder gives the shares to a family member as a gift, there may be gift tax implications.
X. Conclusion
A. Recap of key points
RSUs are a popular form of equity compensation that can offer significant benefits to employees. However, they also come with a number of tax implications that need to be carefully considered. Some key points to keep in mind when dealing with RSUs include the importance of tax planning, the different tax treatments for RSUs and other forms of equity compensation, and the impact of liquidity events on RSUs.
B. Importance of tax planning for RSUs
Given the complex tax rules surrounding RSUs, it is important for both employers and employees to engage in tax planning early on in the RSU grant process. This can help to ensure that both parties are aware of their tax obligations and can take steps to minimize their tax liability.
C. Resources for further information on RSU tax planning
If you are looking for more information on RSU tax planning, there are a number of resources available. One good place to start is with your company’s stock plan administrator, who can provide guidance on the specifics of your RSU grant. In addition, you may want to consult with a tax advisor or financial advisor who can help you navigate the complexities of RSU tax planning. Finally, there are a number of online resources available, including the IRS website, that can provide additional information on RSU tax treatment and other related topics.
