Tech stocks are booming — but employees who are compensated in company stock may want to consider how their gains could affect their tax bill.
Key things
- Shares of Nvidia are trading more than 200% higher than at the start of the year, one of several Big Tech companies with share price jumps.
- Tech firms often give limited stock units to their employees, a perk that could pay off big for those employees this year.
- The tax implications of RSUs often catch these workers by surprise, sometimes even placing them in higher tax brackets.
Actions from Nvidia (NVDA) are trading 200% higher than at the start of the year, while Amazon (AMZN) up to 55%, Apple (AAPL) gained 47% and Microsoft (MSFT) moved 44% higher, among other gains this year in tech stocks. Employees who received Restricted Stock Units (RSUs) which they put in as part of their compensation package this year, see huge gains as a result – but may be surprised by a bigger tax bill next year.
“A lot of times the amount withheld is not enough, especially when prices are going up, so come tax time and you find out, ‘Hey, I’m in the highest possible tax bracket and my deduction is 20% or 25% and now I have to write a big check,'” said David Amann, a Redwood, Calif.-based financial advisor in the Edward tech industry who serves clients.
YCharts
Taxes on RSUs are simple, but they can be surprising
RSU they are one way that companies, especially technology firms, pay their employees with stock, either upon hiring, as part of a performance bonus, or as part of an annual compensation package.
As with some other employee benefit programs, the employee does not take ownership of the stock until it does single after a certain time. Plans typically vest over four years, with a quarter of the shares vesting after each year.
RSUs are relatively straightforward when it comes to their tax treatment. The shares are treated as “ordinary income” as is the cash bonus based on the value of the shares on the day they are transferred.
But with many tech stocks soaring, employees at companies like Nvidia, Microsoft and Apple may be underestimating the taxes owed on this type of employee stock benefit.
Two things often happen, Amann said. First, the employee does not take a withholding on RSUs, which can be 20% or more of the tax liability on the value of the award. But it can be more surprising to employees when the value of the RSUs pushes them into a higher tax bracket, requiring an even larger total tax liability than they prepared for.
Ashley Francis, a tax and financial advisor with the Seattle-based Francis Group, suggested that financial advisors with clients in technology firms reach out to them now, before tax season reveals that their clients were not properly prepared.
“Exercising RSUs later this year will have a wild impact on the final 2023 tax bill,” Francis tweeted. “Maybe it’s a good idea to reach out to us and start discussing now before any unfortunate discussions arise later.
How you handle RSUs depends on your long-term goals
How tech employees want to treat their RSUs when they vest is best determined by their overall financial goals, Amann said, because it’s similar to a cash bonus. If the shares are held by employees, any gains on the shares are taxed as capital gains.
“The mistake most people make with RSUs is they don’t realize they’re immediately taxed on it,” Amann said. “Will it be used for a new home or will it be used for your retirement? This will influence your decisions about when and how to sell.”
In addition to the tax implications, Amann also said that any company employee may want to consider selling RSU shares to diversify their portfolio to protect themselves from any sudden decline in the stock.
Make simple adjustments if available
Most RSU plans allow for federal tax withholding, typically 22%, but between the significant increase in stock prices and significant salaries, many tech workers find themselves in the 32% tax bracket, said Joey Loss, a financial planner at Flow Financial.
“This loophole can cause a big tax surprise at the end of the year, plus potential penalties for late payments,” Loss said.
Some companies allow additional withholding tax on stock vests, such as Google (GOOGLE) and Meta (META), where employees can adjust their withholding amount above the usual 22% amount, said Rachel Elson, a financial advisor at Perigon Wealth Management.
“At least do some math,” she said. “Sell enough to cover that extra tax bill and stash the cash in high-yield savings.”
