How to Maximize Your RSUs and Avoid Tax Surprises

By Hinal Shah, CPA

Introduction: Why RSUs Matter

Restricted Stock Units (RSUs) are quickly becoming a key ingredient in modern compensation packages, especially for professionals in tech, biotech, and finance. They offer a unique opportunity to share in your company’s growth and can create substantial wealth—but only if you understand how to navigate the tax and planning landscape.

Tax Timing: Grant vs. Vesting

When you receive an RSU grant, it’s simply a promise—there’s no tax due. The real action starts at vesting. That’s when your shares become yours, and the IRS takes notice: the fair market value of your vested shares is treated as ordinary income and reported on your W-2, even if you don’t sell a single share.

Withholding Nuances: Why 22% May Not Be Enough

Many companies withhold taxes on RSUs at a flat 22% federal rate (the minimum required by the IRS). If you’re a high earner or live in a high-tax state, this might not come close to covering your true liability. This shortfall can lead to surprise tax bills or penalties when you file your return.

Pro Tip: Adjust your payroll withholding or make estimated tax payments if your RSU income pushes you into a higher bracket.

Post-Vesting Choices: Immediate Sale vs. Holding for Gains

After vesting, you face a key decision:

• Sell-to-Cover: Sell enough shares to cover your tax bill and pocket the rest. If you sell all shares immediately, you generally won’t owe more tax on the sale.

• Hold for Potential Gains: Keep the shares and hope for further appreciation. If you hold for more than a year, you may qualify for lower long-term capital gains rates on future profits.

Each option comes with risk and reward—your ideal move depends on your financial goals and risk tolerance.

Reporting Requirements: W-2 and 1099-B Essentials

• W-2: Your employer reports RSU income as wages when you vest.

• 1099-B: When you sell RSU shares, your broker will issue a Form 1099-B. However, the cost basis shown on the 1099-B is often reported as zero or may not reflect the fair market value at vesting (for RSUs) or the correct purchase price (for ESPPs). This can easily lead to double taxation if not addressed.

  
  

Pro Tip: Always review the supplemental statement provided by your brokerage firm. This statement typically details the correct cost basis and necessary adjustments. A CPA or tax professional specializing in equity compensation can help you accurately adjust your basis and avoid overpaying taxes.

Common Pitfalls

• Under-withholding: Relying solely on company withholding can leave you with a surprise tax bill.

• Cost Basis Confusion: Misreporting your cost basis could mean double taxation.

• Stock Concentration: Holding too much company stock exposes you to unnecessary financial risk.

  
  

Strategies: Sell-to-Cover, Tax Planning, and Harvesting

• Sell-to-Cover: Selling shares at vesting to cover taxes is often the simplest and safest strategy.

• Work With a CPA: Professional advice can help you anticipate tax impacts, adjust withholdings, and optimize your overall financial picture.

• Tax-Loss Harvesting: If your RSUs drop in value after vesting, selling at a loss can offset gains elsewhere.

• Diversification: Don’t let a single stock dominate your portfolio—balance is key.

  
  

Final Advice: Plan Early and Get Expert Help

RSUs are a fantastic opportunity—but only with the right plan. Avoid tax pitfalls, protect your gains, and build your financial future by being proactive.

Every situation is unique. As a CPA with deep experience in equity compensation, I help clients create personalized RSU strategies to maximize after-tax value and support their long-term goals.

Ready to make the most of your RSUs? Contact me hinalshahcpa@gmail.com for a tailored review and planning session.

And stay tuned! My next article will cover Employee Stock Purchase Plans (ESPPs)—another powerful (and often misunderstood) tool for building wealth through company stock. Don’t miss it!