Restricted Stock Units (RSUs) are a valuable part of many compensation packages, especially in tech and corporate environments. When RSUs vest, they become taxable income—and understanding how to calculate that income can help you plan for taxes and make informed financial decisions.
Step 1: Identify the Number of Vested Shares
The first step in calculating your RSU income is determining how many RSUs have vested. Vesting typically follows a schedule set by your employer, such as annually or quarterly over a few years. Only the shares that have vested count as income for that tax year.
Step 2: Determine the Fair Market Value (FMV) at Vesting
Next, find the fair market value (FMV) of your company’s stock on the date the RSUs vest. The FMV is usually the closing price of the stock on the vesting date. This value is key because it’s what the IRS uses to determine how much income you’ve received.
Step 3: Multiply Shares by FMV
To calculate your gross RSU income, multiply the number of vested shares by the FMV at the time of vesting.
Formula: RSU Income = Vested Shares × FMV at Vesting
Example:
If 100 RSUs vest and the stock is trading at $50 per share on that date, your RSU income is: 100 × $50 = $5,000
This $5,000 is treated as ordinary income and added to your W-2 wages.
Step 4: Subtract Withholding Taxes
Just like your salary, RSU income is subject to tax withholding. Employers typically withhold federal income tax, state income tax, and FICA (Social Security and Medicare) taxes. To find your net RSU payout, subtract these withholdings from the gross RSU income.
In many cases, your employer will automatically sell a portion of your vested shares to cover the taxes, a process known as “sell to cover.” Alternatively, you might pay the taxes out-of-pocket and keep all the shares.
Final Thoughts
RSUs can significantly increase your taxable income in a given year, so it’s important to know how to calculate their value and prepare for the tax impact. Use the simple formula—Vested Shares × FMV at Vesting—to estimate your RSU income, and consider working with a tax advisor to develop a strategy that minimizes your tax burden.
