Learn What to Do With RSUs on Form W-2

If you see "RSUs" in box 14 of Form W-2, how do you get that information into the tax software and on to the client's Form 1040?
© Ali Majdfar / Getty

This past tax season I was really frustrated. Here I was, sitting at the computer, with a stack of tax documents to enter to my professional-grade tax software. I was putting in a client's W-2. Everything goes along just fine until I come to box 14. That's where the employer's payroll service puts in all manner of "other" information. This particular W-2 has a numerical figure next to the letters RSU.

I knew RSU meant restricted stock units. But for the life of me, I didn't remember how to get that RSU information from the W-2 onto the tax return. Do I need to enter something in the W-2 section of my tax program? Do I need to enter this information somewhere else on the tax return?

My software was no help. Curious, I turned to my default search engine. I typed in "RSU on W-2" – and the search results that came back didn't reveal anything useful that I needed to know. I tried searching, again and again. Each time, I found lots of blah-blah-blah, but no real information. By real information I mean information that would help me, right now, finish working on my client's tax return.

So I researched this issue myself. And I'm sharing my research notes with you, dear reader. My hope is you will find this useful, will reduce your frustration, helps you prepare tax returns more confidently and accurately.

Now, let's get ourselves situated.

The Amount Stated in Box 14 for RSUs Is Already Included in Box 1 Wages.[1]

For example, if we have $234,567 reported in Box 1 as wages and we have $12,345 reported in Box 14 labeled as RSUs, then that $12,345 is already included in the $234,567 amount.

Restricted stock and restricted stock units are included in an employee's taxable wages when one of two things happens:

  1. The restricted stock vests, and thus become unrestricted. In this case, the fair market value of the stock at the time of vesting (less any cost to purchase the restricted stock) is the amount of income included in the employee's wages.[2]
  2. At the time the restricted stock is transferred to the employee and the employee makes an 83(b) election. In this case, the fair market value of the stock at the time the restricted stock is transferred (less any cost to purchase the restricted stock) is included in the employee's wages.[3]

Next, Record Basis in the Restricted Stock for Future Reference

Basis in restricted stock is the amount paid for the stock plus the amount included as taxable income.

In the example above, the taxpayer has at least $12,345 of basis in the restricted stock, since that's the amount reported on the Form W-2. (I say at least because the taxpayer might have paid cash out-of-pocket for the shares. We will need to ask the client in order to find out.)

This basis information will come in handy when these shares are sold. When the shares are sold, we will calculate gain or loss on the investment by subtracting basis from the sales proceeds.

Practice Pointer: Watch the Withholding

Restricted stock and restricted stock units are subject to federal and state income tax, to Social Security and Medicare taxes (FICA), and any other payroll-related taxes.

This can pose a challenge for our clients. Why? Because the restricted stock is a cashless transfer of value.

The employer transfers shares of its stock to the employee. A restriction is placed on the stock, so the employee cannot sell or transfer that stock until sometime in the future when the stock vests. The value of that restricted stock is included in the employee's income (either at the time when the shares vest or, if an 83(b) election is made, at the time of the transfer). So far no cash has changed hands. But the value of restricted shares is subject to withholding. And the withholding must be in cash. So the withholding is going to come from other sources – most likely from the employee's regular pay.[4]

There's another withholding snafu to be aware of. The employer could put the restricted stock income in with the regular pay for the pay period.

This will cause a higher percentage of the employee's pay to be deducted for tax withholding. And it might result in the employee being over-withheld. Alternatively, the employer could put the restricted stock income as a bonus or supplemental pay period. In this case, it's possible that the employee could be under-withheld. Employers withhold at a flat 25% on the first $1 million of supplemental wages paid out during the calendar year. After that threshold is reached (that is, once supplemental wages for the year exceeds $1 million), employers withhold at a flat rate of 39.6%.[5] 

Take our example from above. Our client has $234,567 of total wages for the year – that puts our client in the 33% or 35% tax bracket for the year, depending on their filing status. By definition, this employee will be under-withheld if the employer is withholding only 25% for federal tax. The employee will need to make up the difference through estimated taxes if they want to avoid owing come April. And if you're not going to do estimates, then the client might want to adjust their withholding to have more taxes taken out or to make an extension payment the following spring.

By the Way, RSUs Are Not Coordinated With Form 3921 or Form 3922.

Form 3921 reports the basis information for incentive stock options.

Form 3922 reports basic information for employee stock purchase plan shares.

Restricted stock is not related to either of these forms.

RSUs Go on Schedule D When Sold.

The amount shown on Form W-2 is included as part of a person's cost basis in the shares. This will be reported on Schedule D and Form 8949 in the year that the taxpayer sells the underlying stock.

In Summary

  • If you see RSUs or restricted stock on a Form W-2 next to a dollar amount, then that dollar amount is already included as part of the employee's wages shown in Boxes 1, 3, and 5.
  • Make sure this same amount is included in your cost basis records for that stock in your personal records.
  • There's nothing else to do in terms of preparing the Form 1040. The box 1 wages are added to the wage income reported on line 7 of the 1040, just like normal.
  • Do be aware of any withholding issues for the coming year. It's too late to fix any withholding issues for last year. But for the next tax year, help the taxpayer be alert. Whenever they receive grants of restricted stock, they should be thinking about making an 83(b) election. And when restricted stock vests, they should review their withholding to figure out how much additional tax they will need to pay through estimates or extension payments.

Sources:

[1] Guide to Accounting for Stock-based Compensation: a Multidisciplinary Approach. (PricewaterhouseCoopers LLP, March 31, 2013. PDF. page 4-57. http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc_stock_based_2013.pdf

[2] Internal Revenue Code section 83(a) and Treasury Regulations section 1.83-1.

[3] Internal Revenue Code section 83(b) and Treasury Regulations section 1.83-2

[4] Kaye Thomas. "Grants or Awards of Stock." Fairmark, no date. http://www.fairmark.com/execcomp/grants.htm; and "Withholding on Stock Compensation." Fairmark, no date. http://www.fairmark.com/execcomp/withhold.htm

[5] Employer's Tax Guide (Publication 15, Circular E). Internal Revenue Service, for the tax year 2015. The section on supplemental wages. https://www.irs.gov/publications/p15/ar02.html#en_US_2015_publink1000202352

Further Reading: