So, your company gives you RSU stock- sounds great, right? Free shares, more money, what’s not to love? But then tax season rolls around, and suddenly you owe way more than you expected.
What gives?
This happens all the time, and it’s because RSUs aren’t like regular income. The taxes don’t always get taken out the way they should, and if you’re not paying attention, you can end up with a nasty surprise in April.
The good news? You can avoid this.
You just need to know how RSUs are taxed, keep track of a few key numbers, and plan ahead. Let’s go through it all, step by step, so you’re not caught off guard.
Step 1: Keep Track of Your Cost Basis (So You’re Not Taxed Twice!)
One of the biggest tax mistakes people make with RSUs is not tracking their cost basis, which can lead to paying taxes twice on the same income. Let’s break down what this means.
Wait—What is Cost Basis?
Think of cost basis as what you “paid” for the stock. But with RSUs, you didn’t actually buy the shares—your company gave them to you. So, the IRS considers your cost basis to be the stock’s fair market value on the day they vest.
Now, here’s where things go sideways:
- When your RSUs vest, the value of those shares is reported as income on your W-2—whether you sell them or not.
- Later, when you sell the shares, your brokerage sends you a 1099-B tax form—but the cost basis is often missing or incorrect (sometimes it just says $0).
- If you don’t fix it, the IRS thinks you made way more money than you actually did, and you could get taxed on that income again.
How Do You Avoid Double Taxation?
The key is to keep good records. You need to make sure that when you file your taxes, your cost basis is correctly reported so that you don’t pay extra.
- Save your paperwork. Keep copies of your vesting confirmations, pay stubs, and brokerage statements—these show how much income was already taxed.
- Check your 1099-B. If the cost basis is missing or wrong, adjust it when you file your tax return.
- Work with a tax professional. Seriously, this part is a headache, and getting it right can save you thousands.
This isn’t about being proactive—it’s about just doing it right so you don’t overpay.
Step 2: Plan for Taxes Before April Hits
One of the biggest RSU tax surprises happens because people assume their company is withholding enough taxes for them. Unfortunately, that’s usually not the case.
Here’s the problem:
- When your RSUs vest, your company withholds only 22% for federal taxes.
- But if you’re in a higher tax bracket—say, 32% or even 37%—that 22% isn’t enough.
- You might not notice this right away, but come tax time, you’ll owe the difference.
This is why projections matter. If you don’t check in throughout the year, you could end up short—and by the time you realize it, it’s too late to fix.
How Do You Avoid This?
The best way is to run tax projections throughout the year. At KB Financial Advisors, we do this for our clients to help them stay ahead of tax bills instead of scrambling at the last minute.
A good projection should answer:
- How much RSU income will you have by year-end?
- What’s your estimated tax bill going to be?
- Do you need to sell shares now to cover it, or can you hold?
For example, let’s say your company’s stock was trading at $40 per share when your RSUs vested, but later in the year, it drops to $8 per share. The amount of income you recognize on your W-2 is based on that $40 price, even if the stock price crashes later. If you don’t plan ahead, you might not have enough cash to cover the tax bill on that higher income.
The key takeaway? Know what your bill will be in April before the year even ends.
Step 3: Fix Any Underwithholding Issues
So, you check your tax projection and realize—uh oh—you’re underpaying. Now what?
Here’s What You Can Do:
Option 1: Increase Your Withholding on Your Regular Paycheck
You can ask HR to withhold extra taxes from your regular salary. This won’t fix the RSU underwithholding directly, but it helps balance things out over time.
Option 2: Make Estimated Tax Payments
If you’re short on withholding, you can pay the IRS directly through estimated tax payments. These are quarterly payments designed to prevent big tax bills and penalties.
Option 3: Choose a Higher Withholding Rate on RSUs
Some companies allow you to elect a higher tax withholding rate when RSUs vest. If your employer offers this, it’s a great way to make sure you don’t fall behind.
The goal here is simple: Make sure you’re paying enough throughout the year so you’re not stuck with a massive bill in April.
Step 4: Use Tax Strategies to Reduce What You Owe
Once you’ve handled the basics, you can take things a step further and actually lower your tax bill.
Once you’ve handled the basics, you can start looking for ways to actually reduce your tax bill.
Here Are a Few Smart Tax Moves:
Max Out Your 401(k)
This is an easy win. Contributing to your 401(k) reduces your taxable income, meaning less of your RSU income gets taxed at higher rates.
Delay Selling Shares if Possible
If you’re planning to sell RSU shares for cash, consider waiting until January instead of selling in December. This spreads your income across two tax years, which might help you stay in a lower tax bracket.
Use Tax Loss Harvesting
If you have losing investments in your portfolio, selling them can create losses to offset the gains from your RSU sales. This helps lower the taxes you owe.
Increase Charitable Giving
If you’re already planning to give to charity, consider donating appreciated stock instead of cash. By giving stock directly to a donor-advised fund (DAF), you avoid capital gains tax and still get a full deduction for the donation.
Avoiding Surprise RSU Taxes: The Big Picture
RSU taxes don’t have to be stressful, but they do require some planning. The biggest mistake we see? People assume that because their company is handling some withholding, everything is covered. That’s almost never the case. The tax system for RSUs isn’t automatic like your regular paycheck—it requires you to be proactive, track the right numbers, and plan ahead.
If you don’t take control of your RSU tax strategy, you might be in for an expensive surprise. But the good news? A little preparation goes a long way.
Here’s a recap of your step-by-step game plan:
1️⃣ Track your cost basis so you don’t get taxed twice. Keep records of your vesting confirmations and make sure your 1099-B reflects the correct stock value at vesting.
2️⃣ Do tax projections throughout the year to avoid surprises. Stock prices change, tax brackets shift, and withholding often falls short. Knowing what you’ll owe ahead of time means no last-minute panic.
3️⃣ Fix underwithholding issues early. If your company’s standard 22% withholding isn’t enough, increase your salary withholding, make estimated tax payments, or elect a higher withholding rate if available.
4️⃣ Use smart tax strategies to reduce what you owe. Max out your 401(k), delay income when possible, use tax-loss harvesting, and consider donating appreciated stock to avoid capital gains tax.
If you’re in the market for a tax team that truly understands the ins and outs of equity compensation—from RSUs to stock options and everything in between—you’re in the right place.
Here at KB Financial Advisors, we work with tech professionals year-round, helping you navigate the complexities of RSU taxation, optimize your withholding, and build a smart, long-term tax strategy that fits your financial goals.
No more tax surprises. No more last-minute scrambling. Just a clear plan tailored to your stock compensation.
Simply head over to our Get in Touch page and book your introductory call today.
We look forward to chatting with you.
Until next time!
