Getting taxed on RSUs(USA)?

Question

I am currently living and working in NYC, and when I joined my job, I was awarded couple hundreds of stocks which will vest in periodic intervals over the next couple of years. On my 2020 W2, on box 14, I have line for RSU with value 85K which corresponds with the value of vested stock units in 2020. However, these value of stock units seemed to have been considered as income on my W2. But those stock units are in my brokerage account- I haven't sold them so I actually don't have money for them. What's more, when I go to do my taxes, it says I owe $6K in Federal taxes. However, every time the stock vested, my company took some amount of stock units and sold them off for tax(at a whopping 22% tax), so I have already paid tax on vested units. So for example:

Box 1(Wages, tips, other income): $222,647
Regular Income: $137,000
RSU: $85,000
Taxes Paid: $47,000

So it seems vesting stock units pushed my income level to another tax level(even though I actually don't have liquid money for the stocks) and the tax that I have already paid for my regular weekly wages + stock vesting isn't enough to cover the tax liability at that level. Is this a normal scenario? Shouldn't the taxes being taken out when the stock vests be enough cover the liability? If the stock tanks, wouldn't I be paying taxes for money I don't have ?

Answer 1

Here's a basic scenario to explain what's happening. Say you are awarded 1,000 shares of company stock that's worth $25 per share at the time of the vesting. When those shares are released to you, it counts as $25,000 of income (25 * 1,000). Just like "regular" income, a portion of that is withheld to cover at least part of your tax burden. Stock awards are treated like bonuses, so a flat 22% of that income must be withheld. They do that by withholding shares, so instead of 1,000 shares you get 880 shares worth $19,500 (780 * 25). The other $5,500 is paid to the government and including in your withholding when you file your taxes.

Since 22% is lower than your marginal tax bracket, that withholding wasn't enough to fully cover your overall tax bill, and you have tax due when you file. If instead, you had changed your W-4 to increase your withholding, more tax would have been taken out of your regular paycheck and you would have had a smaller tax bill at filling. So it's just a matter of when your tax is paid, not how much is paid.

I've ignored state taxes but those would be withheld in the same manner if you have state income tax.

If the stock tanks, wouldn't I be paying taxes for money I don't have ?

You are taxed on the income which is fixed no matter what the stock does after vesting. You can always sell your shares to cover your tax bill or just remove that risk.

Also note that if you have a loss after selling your shares, then that reduces your tax bill since it's basically an investment loss. And vice-versa. If the stock goes up after vesting and you sell for a gain, you'll pay capital gains tax on the gains. It's the exact same math as if you were paid a bonus in cash and used it to buy company stock.

When I receive RSUs, my thought is "if I had this much in cash, would I buy my company's stock?" The answer is almost always NO, and I sell my shares as soon as I can. I either have better uses for the money, like paying off debt or reinvesting in other things, so keeping it in my compnay's stock is not always the best decision.

Answer 2

Withholding for RSUs is an estimate of the taxes that will be due, just as it is for any other type of income. In your case, the 22% withholding is significantly less than your 35% tax bracket, so you will owe additional tax.

I recommend that you increase your withholding for this year and future years by filing a new W-4 with an amount on line 4c to pay the additional amount of tax you owe on the RSUs.

If you’re concerned about the risk owning your company’s stock, then you should sell it.