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 ?

  • Based on the information you've provided here, assuming you're single and taking the standard deduction, your total federal tax bill would be ~$48,400. So you should only owe an extra ~$1400. I'm not sure why they would only sell RSUs to cover taxes at a 22% rate because some of that income would push into the 24%, 32%, and 35% brackets. But regardless, your withholding seems roughly correct. Did you have other income which is responsible for the $6k you owe? – Craig W Feb 28 at 18:03
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    It's quite simple: RSUs are treated as if you were given cash used to immediately buy the stock. If you are concerned the value will go down, you should sell, like you would any stock whose value you think will drop. – chepner Feb 28 at 18:14
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    If your company has truly withheld too little for taxes, you can also sell additional shares immediately to cover the difference. – chepner Feb 28 at 18:16
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    @Craig RSU grants are treated as supplemental income by the IRS, so companies withhold at the supplemental withholding rate, which is 22%. They don't get to choose whatever amount they want to withhold. – Daniel Feb 28 at 19:05
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    @Craig withholding like regular income would likely have resulted in less than 22% withheld. Since regular income tax withholding is related to a person's anticipated effective (rather than marginal) income tax rate. – Daniel Mar 1 at 0:25

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.

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