How to Report RSUs on Your Tax Return

Understanding how to report Restricted Stock Units (RSUs) on your tax return is crucial for anyone who receives this form of compensation. RSUs can affect your taxable income and require careful attention during tax preparation. Inaccurate reporting could result in complications or penalties.

This guide addresses the essential aspects of handling RSUs in your tax filings, including timing, income determination, withholding rules, declaration processes, and potential capital gains.

Timing of Taxable Events

RSUs are taxed when they vest, not when they are granted. The fair market value of the shares on the vesting date determines your taxable income. For example, if your RSUs vest on January 15, 2025, the value of the shares on that date is included in your income for the 2025 tax year. Vesting schedules outline when you gain full ownership of the shares. These can vary, with cliff vesting granting all shares at once after a set period or graded vesting distributing shares incrementally over time. Each vesting date represents a separate taxable event, requiring the fair market value of the shares on that date to be reported as income.

Determining Income Amount

When RSUs vest, the value of the shares is treated as ordinary income, subject to federal income tax, Social Security, and Medicare taxes. The fair market value is generally the stock’s closing price on the vesting date. For instance, if 100 RSUs vest at $50 per share, the reported income would be $5,000. This amount is included on your W-2 form as compensation. Employers typically provide documentation, including vesting dates and stock prices, but it’s wise to verify these figures against market data to ensure accuracy. The IRS requires this income to be reported in the year the RSUs vest, making accurate record-keeping essential.

Withholding Rules

When RSUs vest, employers usually withhold taxes automatically, similar to regular paycheck deductions. The statutory supplemental wage rate, set at 22% as of 2024, is commonly applied. For example, if vested RSUs are worth $10,000, $2,200 would be withheld for federal taxes.

However, the withheld amount may not match your actual tax liability. If your marginal tax rate exceeds 22%, you might need to make additional estimated tax payments to avoid penalties. Conversely, if the withholding exceeds your liability, you could receive a refund when filing your tax return. Some employers offer alternative withholding methods, such as selling a portion of the shares or using cash to cover taxes. This flexibility can be advantageous, especially if the stock value rises after vesting.

Declaring on Your Return

To declare RSUs on your tax return, ensure the income from vested shares is accurately reflected on your W-2 form. This amount represents the fair market value of the shares at the time of vesting and typically appears in Box 1 of the W-2, contributing to your total wages. It is then transferred to line 1 of Form 1040 as part of your gross income. Verify that withholding taxes are also correctly reported.

Potential for Capital Gains

After RSUs vest and the income is reported, any increase in the stock’s value can result in capital gains when the shares are sold. Holding the shares for more than one year post-vesting qualifies the gains for long-term capital gains treatment, taxed at lower rates—0%, 15%, or 20%—depending on your income. Selling within one year results in short-term capital gains, taxed at ordinary income rates. The decision to sell or hold RSUs should consider market conditions and personal financial goals. Diversifying your portfolio, including selling some RSUs, can help manage risk. Consulting a financial advisor can ensure your RSU strategy aligns with broader financial plans, including retirement and tax efficiency.