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Approximately 11.8 million people work in technology in the US today, and these professionals face financial issues and workplace pressures uncommon in other industries. They make unique, high-stakes financial decisions — for example, dealing with stock-based compensation.

In Personal Finance for Tech Professionals in Silicon Valley and Beyond, wealth manager Bruce Barton aims to provide a comprehensive personal finance resource specifically for tech professionals and the HR and recruiting professionals who support them. 

In the following excerpt, Barton covers the value and taxation of restricted stock and restricted stock units (RSUs), forms of compensation that many tech employees may encounter in their careers.

What Is It Worth?

The value of your restricted stock or RSUs is easy to calculate. Multiply the number of shares or units (assuming a 1:1 conversion ratio of units to shares) by the current stock price of the company. The result is the total value of your restricted stock or RSU.

Nearly all online accounts will show you separately the value of the vested portion of your restricted stock or RSUs and the value of the unvested portion. Most stock plan websites also provide information about the vesting schedule of your grants.

Restricted Stock and RSU Taxation

Restricted stock is not taxable to you when you receive it. The stock becomes taxable to you as it vests and your shares are no longer subject to restrictions on sale or transfer. The market value of the shares you receive is taxable to you as ordinary income and is reported on your pay stub along with your regular pay amounts. For example, if you became vested in 250 shares of your company’s stock and the stock was trading at $20 per share on the day your shares vested, you would have $5,000 of ordinary income from those shares. Any dividends you receive are also taxed as ordinary income, not dividend income.

Taxation of RSUs works similarly. When your RSUs vest, your company’s stock plan administrator exchanges your vested restricted stock units for actual shares of your company’s stock and places those shares in your account. The market value of the shares you receive is taxable to you as ordinary income.

Income from restricted stock and RSUs shows up on your pay stub along with your normal salary and bonus income. As with regular wage income, your employer is required to withhold taxes on the income you receive in the form of shares. However, because you receive income in the form of shares and not cash, there is no cash available to withhold for taxes. Your company may give you the option to pay the taxes with cash from other sources, such as your stock plan account. More commonly, your company will either withhold some of your shares to pay taxes or automatically sell some of your shares to pay taxes.

Personal Finance for Tech ProfessionalsThe amount of withholding for taxes on income from stock is not the same as the amount of withholding from your wage and salary income as determined by the number of allowances you selected on Form W-4. Taxes on stock income are withheld at different rates. For income received in the form of company stock, your company will follow IRS rules for withholding federal income tax according to the supplemental wage withholding rules. Supplemental wages include wage payments that are reported separately on your pay stub from your regular wages, such as bonuses, commissions, severance, accumulated sick leave, back pay, awards, restricted stock, and RSUs. The IRS rules state that on supplemental wages above $1 million, income tax is withheld at a rate of 37 percent (decreased from 39.6 percent in 2017). On supplemental wages of $1 million or less, income tax is withheld at a flat rate of 22 percent (decreased from 25 percent in 2017), or supplemental income is added to regular income and the regular wage withholding rate for the combined income is used.

For tech-industry states with a state income tax, most require withholding on supplemental wage income at rates ranging from 3-6 percent. California and New York are standouts with higher withholding rates of 10.23 percent and 9.62 percent, respectively.

The key issue here is that withholding rates on your restricted stock and RSU income may not be the same as for your regular income. The amount of tax withheld for you overall for both types of income may be more or less than you will be required to pay in taxes when you file your tax returns. You could be in for a surprise in April if you are not aware of the supplemental wage withholding rules.

Your restricted stock and RSU income are subject to payroll taxes in addition to federal and state income tax. Payroll taxes include federal Social Security and Medicare taxes, as well as potential additional state and local taxes depending on where you live.

Unlike incentive stock options, there are no direct alternative minimum tax (AMT) considerations for restricted stock and RSUs. Only regular tax rules apply.

After you receive actual shares, your cost basis in those shares is their market value on the day you receive them. Taxation after you receive your shares follows the normal rules for gains and losses on investments. If you hold your shares for one year or more and then sell them, you will be taxed at the favorable long-term capital gains tax rates. If you hold your shares for less than one year and then sell them, any gain will be taxed at short-term capital gains rates, which are your ordinary income tax rates. If your shares lose value and you sell them, you are limited in the amount of capital loss you can deduct from your income on your federal tax return to $3,000 per year. Unused losses carry forward to future years.

This is an excerpt from Personal Finance for Tech Professionals in Silicon Valley and Beyond by Bruce Barton, CFP CFA, copyright © 2019. Published by Amplify Publishing, an imprint of Mascot Books.

Bruce Barton, CFP CFA, is a practicing wealth manager in Silicon Valley and the owner and founder of a boutique wealth management firm.



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