Why Are RSUs Taxed So High? Understanding Taxation and Using an RSU Tax Calculator

Introduction

Restricted Stock Units (RSUs) are a popular form of equity compensation, especially in tech and startups. While they offer significant financial upside, many employees are shocked by how heavily RSUs are taxed. This article explains why RSU taxation feels so steep, breaks down the tax process, and highlights how an RSU tax calculator can help you plan effectively.

What Are RSUs?

RSUs are company shares granted to employees, which "vest" (become yours) over time. Unlike stock options, RSUs have inherent value upon vesting. However, the IRS treats RSUs as taxable income, triggering taxes at two critical stages:

At Vesting: The fair market value (FMV) of vested shares is taxed as ordinary income
At Sale: Capital gains taxes apply if you sell shares at a profit

How an RSU Tax Calculator Helps

An RSU tax calculator simplifies estimating your tax liability. By inputting variables like:

Number of vested shares
FMV at vesting
Tax brackets (federal/state)
Holding period for capital gains

Example Calculation:
1,000 shares vesting at $50/share = $50,000 taxable income.
Federal tax (24%) + State tax (8%) + FICA (7.65%) = ~39.65% total.
Tax owed: $50,000 × 39.65% = $19,825.

Case Study: Using an RSU Tax Calculator

Sarah, a software engineer in California, vests 500 RSUs when the stock is $200/share ($100,000 value). Her tax breakdown:

Federal: 32% × $100,000 = $32,000
State: 9.3% × $100,000 = $9,300
FICA: 7.65% × $100,000 = $7,650
Total Taxes: $48,950 (48.95% rate)

Strategies to Reduce RSU Taxation

Sell Shares Immediately at Vesting - Lock in income without price drop worries
Hold for Long-Term Capital Gains - Qualify for lower 15-20% tax rates
Tax-Loss Harvesting - Offset gains with investment losses

Conclusion

RSUs are taxed highly because they're treated as income at vesting and subject to capital gains upon sale. While you can't escape taxation, using an RSU tax calculator and strategic planning can mitigate your liability. Always consult a tax professional to tailor these strategies to your financial goals.