Learn What to Do With RSUs on Form W-2

What restricted stock units are and how they impact your taxes

On a W-2 form, box 14 asks about RSUs
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Restricted stock units, or RSUs, are given to employees as part of their compensation. These shares are not fully transferable until certain conditions have been met, usually a term of employment. After employees have worked with the company for a set number of years, they are considered vested in their stock options and the restricted stock units are transferred to them.

Restricted stock units are not taxable until the vesting schedule is completed. At that point, the entire value of the vested stock is considered ordinary income. The fair market value of the stock becomes part of their wages for the year and is reported on their W-2 form at tax time.

Key Takeaways

  • If you see RSUs or restricted stock on Form W-2 next to a dollar amount, that dollar amount is already included as part of the 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 is nothing else required in terms of preparing Form 1040. The Box 1 wages are added to the wage income reported on line 7 of Form 1040.
  • When restricted stock vests, review your withholding to calculate how much additional tax you will need to pay through estimated or extension payments.
  • If you experience any withholding issues the first year you receive your stock, adjust your withholding for the next year.

Restricted Stock vs. Restricted Stock Units

Restricted stock and RSUs are similar but slightly different.

Restricted stock is given to executives are part of their compensation package. It is nontransferable and can be forfeited if the executive is termination, fails to meet professional benchmarks, or engages is specified personal behavior that reflects poorly on the company. Because executives are voting shareholders and have insider knowledge about their company, restricted stock is subject to insider trading rules.

Restricted stock units are a promise by an employer to grant a certain number of shares to an employee after a period of working at the company. Unlike employees who hold standard restricted stock, those who receive RSUs have no voting rights until their stock is vested.

An 83(b) election allows employees to recognize ordinary income on restricted stock when it is granted, rather than when it vests. If the employee subsequently does not vest in the stock, they receive a tax deduction for the value of that income. An 83(b) election can offer significant tax savings, but it is available only for restricted stock, not for RSUs.

Both restricted stock and RSUs become available under a graded vesting schedule and are considered part of employee wages.

Where to Find Restricted Stock Units on a W-2

The value of restricted stock units is generally recorded in Box 14 of the W-2. Box 14 does not have a standard list of codes, which allows employers to list any description they need. You may see the value of your vested stock followed by "RSU."

However, since this is considered part of an employee's wages, it also is already included in Box 1, where wages are.

If you have $234,567 reported in Box 1 as wages and $12,345 reported in Box 14 labeled as RSUs, then the $12,345 has been included already in the $234,567 amount.

There are other tax forms that deal with different types of employee stock. Form 3921 reports the basis information for incentive stock options. Form 3922 reports basis information for employee stock purchase plan shares. Restricted stock is not related to either of these forms.

Dividends you receive on restricted stock units are considered employee income and should only be reported on your W-2. If you receive a 1099-DIV for the value of your RSU dividends, list them on your Schedule B with a note that you have included them as wages. Do not include them in the total value of dividends that you have received.

What to Know About Selling Restricted Stock Units

Once you are vested in your RSUs, you have the option to either retain the stock or sell it in the future. This will require you to have certain records and use additional forms in reporting your taxes.

1. Record Basis in 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, you have at least $12,345 of basis in the restricted stock since that is the amount reported on Form W-2.

There may be out-of-pocket cash expenses for the shares also. When the shares are sold, you will calculate the gain or loss on the investment by subtracting the basis from the sale proceeds.

2. RSUs Go on Schedule D When Sold

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

Restricted Stock Units and Employee Withholding

After you vest in your stock, RSUs are subject to withholding for federal and state income tax, Social Security and Medicare taxes (FICA), and any other payroll-related taxes. This can create problems with over- or under-withholding that you must adjust for in your own tax payments.

If your employer includes the restricted stock income with your regular pay for the pay period, a higher percentage of your pay is deducted for tax withholding and might result in your wages being over-withheld.

However, if your employer includes the restricted stock income as a bonus or supplemental pay period, it is possible that your wages could be under-withheld.

Employers withhold at a flat rate of 22% on the first $1 million of supplemental wages paid out during the calendar year. Once supplemental wages for the year exceeds $1 million, employers withhold at a flat rate of 37%. 

Using the example above, if you have $234,567 of total wages for the year, you are in the 33% or 35% tax bracket depending on your filing status. You will be under-withheld if the employer is withholding only 22% of your supplemental wages (RSUs) for federal tax.

If you want to avoid owing additional tax in April, you will need to make up the difference with estimated tax payments during the current tax year. If you do not want to make estimated tax payments, you can also adjust your withholding to have more taxes taken out or make an extension payment the following spring.

In some cases, you may be unaware that your taxes have been over- or under-withheld until you are filing your taxes in April. If this happens, you can file a new Form W-4 with your employer to adjust your withholding.

Article Sources

  1. Internal Revenue Service. "Equity (Stock) - Based Compensation Audit Techniques Guide." Accessed Feb. 14, 2020.

  2. Internal Revenue Service. "General Instructions for Forms W-2 and W-3," Pages 18-20. Accessed Feb. 14, 2020.

  3. Internal Revenue Service. "Publication 525: Taxable and Nontaxable Income," Page 14. Accessed Feb. 14, 2020.

  4. Internal Revenue Service. "2019 Instructions for Schedule D," Page 2. Accessed Feb. 14, 2020.

  5. Internal Revenue Service. "2019 Instructions for Schedule D," Page 1. Accessed Feb. 14, 2020.

  6. Internal Revenue Service. "Publication 15: Employer's Tax Guide," Pages 19-20. Accessed Feb. 14, 2020.

  7. Internal Revenue Service. "About Form W-4, Employee's Withholding Certificate." Accessed Feb. 14, 2020.