The Short AnswerRSUs are taxed as ordinary income when they vest, and employers typically withhold federal tax at a flat 22% on supplemental wages up to $1 million, well below a 35% or 37% bracket. Executives who plan around vesting dates, bonuses and liquidity events avoid the April surprise and redirect the savings into tax-advantaged growth.
Why Do RSUs And Bonuses Leave Executives Owing Tax?
Supplemental wages such as bonuses and vested RSUs are generally withheld at a flat 22% federal rate up to $1 million a year, and 37% above that. An executive in the 35% or 37% bracket can owe a large balance at filing time, plus California tax on top. Planning the gap in advance keeps it from becoming a scramble.
Which Equity Events Need Tax Planning?
- RSU vesting, which counts as wages the day shares vest.
- Stock options, where incentive stock options can trigger the alternative minimum tax.
- Concentrated stock in one company, and the capital gains on diversifying it.
- Deferred compensation elections, which must be made before the year the income is earned.
- A liquidity event, which can put a decade of income into one tax year.
Where Should Executives Put The Tax Savings?
Once the tax is planned, the question becomes where the savings go. For many executives that means a mix of qualified plans, a tax-efficient investment account and permanent life insurance designed for tax-free access later. See retirement tax planning.
Common Questions
How are RSUs taxed?
RSUs are taxed as ordinary wage income on the value of the shares the day they vest. Any gain or loss after vesting is a capital gain or loss when you sell. Federal withholding is usually 22% on supplemental wages up to $1 million, which often falls short of the actual bracket.
Why do I owe so much tax after my RSUs vested?
Because the default 22% federal withholding on supplemental wages is lower than the 32% to 37% bracket many executives are in, and state withholding may also fall short. The difference is due at filing, sometimes with an underpayment penalty.
