The entire value of the stock is considered ordinary income after RSUs have been transferred. The fair market value of the stock at the time of distribution becomes part of the employee’s wages for the year, and it’s reported on their W-2 form at tax time. If you don’t sell the shares right away, you’ll later owe capital gains tax on the amount of any gain (the sale price minus the fair market price when you received the shares). If the share price has gone down, you’ll be able to recognize a capital loss on the sale.
RSUs and Withholding
Your employer reports your income to you and to the IRS on your Form W-2. You’ll receive copies providing you with the information you’ll need to prepare your federal and state tax returns. RSUs are considered income for the tax year in which they’re transferred to you. They’re subject to withholding for federal and state income tax, Social Security and Medicare taxes, and any other payroll-related taxes. This can create problems that you should adjust for in your own estimated tax payments or on your Form W-4. A higher percentage of your pay is deducted for tax withholding and might result in your wages being over-withheld if your employer includes the restricted stock income with your regular pay for the pay period. However, your wages could be under-withheld if your employer includes the RSUs as a bonus or supplemental pay. Employers withhold at a flat rate of 22% on the first $1 million of supplemental wages paid out during the calendar year. Once supplemental wages for the year exceed $1 million, employers withhold at a flat rate of 37%. The 22% flat rate could result in too little being withheld for taxes, depending on your tax bracket.
How To Read RSUs on Form W-2
The value of RSUs is typically recorded in Box 14 of the W-2, which is labeled “Other.” Box 14 doesn’t have a standard list of codes, thus allowing employers to enter any description they like. You might see the value of your vested stock followed by “RSU.” Suppose you have $134,567 reported in Box 1 as wages and $12,345 reported in Box 14 labeled as RSUs. The $12,345 has been included already in the $134,567 amount, so you don’t have to add the RSUs in Box 14 to your wages when you file your taxes. RSU’s don’t pay dividends until they vest. But a company might pay something equivalent to a dividend on unvested RSUs. These dividend-equivalent payments are considered employee income and are reported on your W-2. List them on your Schedule B with your tax return.
What To Know About Selling RSUs
You can either retain the stock or sell it after you’re vested in your RSUs. You will need to keep records and use additional forms when reporting your income and filing your tax return. You must record your basis in the RSUs, which is the amount paid for the stock plus the amount included as taxable income. You had a basis of at least $12,345 in the example above because that’s the amount reported on Form W-2. Calculate your gain or loss on the investment by subtracting the basis from the sale proceeds when the shares were sold. Report the sale by filing Schedule D and Form 8949.
