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Lesson in Course: Finance at work (advanced, 4min )
I am at a late stage startup or my company has already gone public. What are some ways I can save on taxes?
RSU (restrictive stock unit) taxation works the same way as RSAs (restrictive stock award) without an 83(b) election. We owe ordinary income taxes when our shares vest and pay capital gains taxes when we sell the shares. However, one benefit of RSUs is that we don't have to pay for them upfront as we do with RSAs.
For RSUs, The IRS considers the entire value of the RSU on the vesting date as taxable. This value is calculated by taking the share price on the vesting date and multiplying it by the number of shares vested.
This can create the problem of building up a large tax bill that will be due when the shares vest. This problem really hits home for employees of private companies who can't sell their shares to help pay for the taxes. If we find ourselves employed at a late-stage startup offering RSUs, we need to file an 83(i) election.
The short video below covers RSUs in more detail.
Filing an 83(i) election within 30 days of the grant date of the RSUs allows us to defer the taxes owed on the vested shares for up to 5 years or a disqualifying event, usually an event that allows us to sell the shares.
This is a huge benefit for startup employees because it solves the problem of not being able to pay the income taxes owed when the shares vest. However, once the 5 year period is up, we will be on the hook for the deferred taxes. While an 83(i) helps kick the can down the road, companies have implemented employee-friendly double-trigger vesting to further kick the can until we’re able to sell shares to cover the taxes.
Facebook is an example of a company that solved the RSU tax problem by applying double-trigger vesting. Facebook added a second condition to the vesting of RSUs in addition to the time-based service at the company. Under the second condition or double-trigger, the RSUs would not vest until the company was acquired or went public. This held off the vesting, and therefore the tax bill, of the RSUs until the employees were able to sell their shares to cover the taxes.
If we work for a public company or if our company is planning to IPO, our shares can easily be traded on an exchange which would allow us to sell some shares to cover the taxes owed. Note, we cannot make an 83(i) election since the shares are already easily traded on an exchange.
Selling to cover is a strategy where we can sell a portion of our vested RSUs to pay for taxes owed for the vesting period.
For example, let’s say we were granted 1,000 RSUs by a public company that we work for. The shares eventually vest at $50 per share. Since the RSUs are vested and are now worth $50,000, we owe roughly $15,000 in ordinary income taxes. We can sell about 300 of those shares at $50 per share on the day they vest to cover the income taxes on vesting and keep the remaining 700 shares.
Alternatively, we can always sell everything and put $35,000 in the bank.
For extra insight, check out the video by expert Mike Zung, CFP® over on the Watch tab!
While RSUs offer us more tax flexibility than RSAs or stock options, figuring out our income tax owed can be tricky. Tax can vary based on various factors such as holding RSUs or selling right away. If you need help, reach out to an expert on Archimedes today.