Optimizing for RSU Underwithholding

The taxes withheld when your RSUs vest are almost always less than what you will actually owe. You will owe the difference come tax time.

Strategy Overview

Companies follow IRS rules for tax withholding on income. The value of vested RSUs is taxed as ordinary income, but has a special withholding rate (follows "supplemental wages" withholding; 22% for income less than $1 million). This frequently results in most high-income tech workers having a large tax bill come April/tax time. Being aware of this dynamic, and planning accordingly, avoids surprises and potentially opens the door for optimizations.

Tax Details

When RSUs vest, the value you receive is considered income for taxation purposes. And as income, withholding is required, and your company will force sell a portion of your shares to meet that requirement. What tends to surprise people however, is that they owe a material amount of money on their taxes come April. Here's why:

• For tax payment purposes, vested RSUs are taxed as ordinary income (and both state and federal income tax rates fully apply)

• For tax withholding purposes, vested RSUs are classified by the IRS as "supplemental wages", for which the IRS has different (lower) withholding rules (22% for income less than $1 million)

• Nearly all companies follow the IRS required supplemental wages rules (i.e. 22% withholding)

• But as ordinary income (e.g. in addition to your salary), most high-income tech workers will owe a much higher rate (typically 32-37%).

Key Benefits

• Being aware of RSU under-withholding will ensure you are not surprised come April/tax time.

• Proper tax planning will allow you to optimize for this tax. If you meet a safe harbor rule, you can set aside the non-withheld income that you will owe and earn interest on it before you have to pay it in April

Key Considerations/Flags

• Expect a (potentially large) tax bill in April. Your company withheld what they were required to (per IRS), but it likely wasn't enough and you owe, and will need to pay, the difference.

• An under-withholding penalty/fee could potentially apply. In most situations a tech worker will meet a safe harbor rule and simply owe the outstanding tax. But in certain circumstances, the under-withholding on RSU vesting income is significant enough to result in penalty fees.

Strategy: When to Consider This and When to Avoid It

​🟢When to Consider This Strategy:

• When you are a high-income worker who has RSUs. Every individual who has RSUs should be aware of the above dynamic.

​🔴When to Not Use This Strategy:

• If you don't have RSUs. The above only applies to individuals with RSUs.

Example

For more information and RSU withholding examples, please see: RSU Taxation