UPDATE: The Treasury recently announced tax changes and updates in response to COVID-19, updates include an extension of the first installment of tax year 2020 quarterly estimated taxes to July 15, 2020. Some information in this post however requires additional IRS guidance and may require updating. We will update as soon as we receive additional guidance. Please see the latest information on tax deadlines and updates related to COVID-19 here.
Restricted stock units
A restricted stock unit is a substitute for an actual stock grant. If your company gives you an RSU, you don't actually receive company stock. Rather, you receive units that will be exchanged for actual stock at some future date. Typically, the date you take ownership of the actual shares, known as the vesting date, is based on either time or performance.
When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
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With a stock grant, a company provides you with stock shares rather than a unit that gives you a future right. However, this doesn't always mean you're immediately free to sell the shares. Many stock grants have a vesting period, during which you may still lose the rights to the stock.
Only when you are fully vested in the stock do you have 100% ownership rights to do with the stock as you please. As with RSUs, stock grants typically vest after a period of time, or after certain performance measures are met. You're not liable for income tax until your stock grant vests, at which point you must report income equal to the value of the stock.
Selling your stock
You'll likely have to pay taxes again if you sell stock you received through an RSU or a stock grant. After you pay the income tax on the fair value of your stock, the IRS taxes you the same as if you bought the stock on the open market. Here are the different ways you can be taxed:
- If you sell the stock at a higher price than its fair value at the time of vesting, you'll have a capital gain
- If you hold the stock for less than one year, your gain will be short term, and you'll owe ordinary income tax on it
- If you hold the stock for one year or more, your gain will be long term, meaning you'll pay tax at the more favorable capital gains rate
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Paying your taxes
Since stock you receive through stock grants and RSUs is essentially compensation, you'll usually see it reported automatically on your W-2. Typically, taxes are withheld to go against what you might owe when you do your taxes. As with all withholding, the taxes your employer deducts from your paycheck may not be enough to cover the full amount of tax you owe when you file your return.
If your employer doesn't withhold tax on your stock grant or RSU, you may be responsible for paying estimated taxes. With estimated taxes, you'll have to send payments to the IRS about every quarter, on April 15 (July 15 in 2020), June 15, September 15 and January 15. The payments are estimates of what you'll owe in total when you prepare your tax returns for that year. For example, if you get a huge stock grant in February, you'll be expected to pay estimated taxes for that grant on April 15 (July 15 in 2020), if there is no employer withholding. However, if your next stock grant isn't until December, you might not need to send estimated payments in June or September.
If you don't want cash withheld from your paycheck, you may be able to pay the tax by having your employer take it out of the shares. For example, if you need 10% tax withheld and receive 100 shares of stock, your employer may be able to liquidate 10 shares and give you a net grant of 90 shares.