RSU Tax Payment Election: What Are Your Options?
Explore the financial choices available when your RSUs vest. Learn how your tax payment election method impacts your net shares and future tax reporting.
When you receive Restricted Stock Units (RSUs) from your employer, you will eventually face a tax bill. An RSU tax payment election is the choice you make about how to pay the income taxes that become due when your RSUs vest. This decision directly impacts how many shares of company stock you ultimately own.
Understanding the RSU Taxable Event
The tax obligation for RSUs is triggered when they vest, not when they are granted. The vesting date is the day you gain full ownership of the shares. On this date, the total value of the vesting shares is considered compensation income, similar to your regular salary.
Taxable income is determined by multiplying the number of vesting shares by the stock’s Fair Market Value (FMV) on the vesting date. For example, if 100 RSUs vest when the company’s stock price is $50, you have recognized $5,000 of ordinary income. This amount is subject to federal, state, and local income taxes.
This income is classified as supplemental wages and is subject to Social Security and Medicare taxes, known as FICA taxes. Because the value of the shares is treated as income, your employer is required to withhold taxes, leading to the need for a payment election.
Available Tax Payment Election Methods
Once your RSUs vest, you must cover the resulting tax withholding. Companies offer several methods to satisfy this obligation. Each option has a different impact on the number of shares you retain and your immediate cash flow.
Sell-to-Cover
The most common method is the sell-to-cover transaction, where your company’s equity plan administrator automatically sells a portion of your newly vested shares to cover the estimated tax withholding amount. The proceeds are remitted to tax authorities, and you receive the remaining net shares in your brokerage account. For instance, if 100 RSUs vest at $50 per share ($5,000 income) with a $1,750 tax obligation, the broker sells 35 shares, and you would retain the remaining 65 shares. This is often the default election if you do not make an active choice.
Pay with Cash
Another option is to pay the tax liability using personal funds, which allows you to keep all vested shares. To use this option, you must deposit sufficient cash into your brokerage account before the vesting date to cover the taxes owed. Using the same example of a $1,750 tax obligation on 100 vested shares, you would transfer $1,750 to your brokerage account and receive all 100 shares. This approach is best for those who want to maximize their ownership stake and have available cash.
Net Share Withholding
A third method is net share withholding, which is functionally similar to sell-to-cover. Instead of selling shares on the market, the company withholds a number of shares equal in value to the tax obligation and pays the tax from its own funds. In our example, the company would withhold 35 shares to cover the $1,750 tax bill, and you would receive the net 65 shares. From the employee’s perspective, the outcome in shares received is identical to the sell-to-cover method.
How to Make Your Election
The election process is managed through an online portal from your company’s equity plan administrator, such as Fidelity, ETRADE, or Charles Schwab. You must log into your account and make a selection before the deadline, which is a few days prior to the vesting date. Missing the deadline will result in the plan’s default method being applied automatically.
Inside the portal, you will navigate to the section detailing your equity awards and find your RSU grants, including upcoming vesting events. For each event, there will be an option to elect your tax withholding method. The interface will present the available choices and show a projection of the tax liability and resulting net shares.
After reviewing the options and deciding on your preferred method, you will select it and formally submit your choice. The system will ask you to confirm the election to finalize the instruction. It is good practice to save the confirmation page for your records.
Post-Election Tax Reporting
After your RSUs vest and taxes are paid, the transaction is reflected in your year-end tax documents. The ordinary income from the vested shares will be included in Box 1 of your Form W-2. This amount is added to your total compensation, and the taxes withheld are included with your other withholdings.
An important concept for future tax purposes is the cost basis of the shares you now own. Your cost basis per share is the Fair Market Value on the date the RSUs vested, which is the same value used to calculate your ordinary income. For example, if your shares were worth $50 each on the vesting date, your cost basis for each share you retained is $50.
When you sell these shares, you will receive a Form 1099-B from your broker detailing the sale proceeds. You will calculate your capital gain or loss by subtracting your cost basis from the sale price. If you sell the shares for more than their vesting-date value, you have a capital gain; if you sell for less, you have a capital loss.