Restricted Stock Units (RSUs) are shares of company stock granted to employees. RSUs that appear on Form W-2 indicate that shares have been awarded to you, which typically occurs after vesting. This is a taxable event with implications that may affect the withholding of your paychecks and your tax liability when you file your taxes.
Learn how to manage the tax liability that comes with RSUs and how to file them if they appear on your W-2s.
RSU Definition and Example on Form W-2
RSUs are awarded to employees as part of their compensation. These shares are not transferred to employees until certain conditions are met, usually a period of employment. Employees are deemed vested in their stock options when they meet the conditions and the RSUs are transferred to them. RSUs are not taxable until that occurs.
The full value of the shares is treated as ordinary income after the RSUs have been transferred. The fair market value of the shares becomes part of the employee’s salary for the year and is reported on their W-2 form at tax time.
How do RSUs work on Form W-2?
Your employer reports your earnings to you and the IRS on your Form W-2. You will receive copies that will provide you with the information you will need to prepare your federal and state tax returns.
RSUs are considered income for the fiscal year in which they are transferred to you. They are subject to federal and state income tax withholding, Social Security and Medicare taxes, and any other payroll-related taxes. This can create issues that you need to adjust for in your own estimated tax payments or on your Form W-4.
A higher percentage of your pay is deducted for tax withholding and may result in your pay being withheld in excess if your employer includes restricted stock income with your regular pay for the pay period, but your pay could be withheld below your salary if your employer includes the RSUs as a bonus or supplemental payment.
Employers withhold at a flat rate of 22% on the first million dollars of fringe wages paid during the calendar year. Once supplemental wages for the year exceed $1 million, employers withhold at a flat rate of 37%. The 22% flat rate could result in tax withholding that is too low, depending on your tax bracket.
Consider submitting an amended Form W-4 to your employer to adjust your withholding if you believe your taxes are being over or under withheld.
How to read RSUs on Form W-2
The value of RSUs is generally recorded in Box 14 of the W-2, which is labeled “Other.” Box 14 does not have a standard list of codes, allowing employers to enter any description they wish, but you may see the value of your vested shares followed by “RSU”.
RSUs are considered part of your salary, so they are already included in Box 1 of your W-2, which reports your salary.
Assume you have $234,567 reported in Box 1 as wages and $12,345 reported in Box 14 labeled RSU. The $12,345 is already included in the $234,567 amount, so you don’t have to add the RSUs in Schedule 14 to your wages when you file your taxes.
You can also receive dividends on your RSUs. A dividend is a payment made to shareholders from the profits of the company. All dividends you receive on RSUs are considered employee income and should only be reported on your W-2. List them on your Schedule B with your tax return with a note that you have included them as wages if you receive a 1099-DIV for the value of your RSU dividends.
What you should know about selling RSU
You can keep the shares or sell them once you have purchased your RSUs. You will need to keep records and use additional forms when you report your income and file your tax return.
You must record your basis in RSUs, which is the amount paid for the shares plus the amount included as taxable income. You had at least $12,345 basis in the example above, because that’s the amount reported on the W-2.
Calculate your gain or loss on the investment by subtracting the sales proceeds basis when the shares are sold. Report the sale by filing Schedule D and Form 8949.
- Restricted Stock Units (RSUs) are shares of company stock granted to employees.
- RSUs on Form W-2 indicate that shares have been awarded to you, which typically occurs after vesting.
- Once transferred to the employee, the RSUs are included as wages and are taxed at the fair market value of the shares.
- If your employer withholds too much or too little tax on your RSUs, you may need to file a new Form W-4 to adjust.