Avoid RSU Tax Pitfalls: What You Need to Know About Minimizing Double Taxation and Underwithholding

When you receive Restricted Stock Units (RSUs), it's important to understand the tax implications, especially regarding sourcing, cost basis, and underwithholding. Here are the key points to remember:

1. Sourcing RSUs:
   The source of RSU income is based on the workdays you worked during the grant-to-vest period. This means your tax reporting should reflect the actual time you worked in each location, not just the payroll periods, which can sometimes lead to discrepancies.

2. Discrepancies with Payroll Reporting:
   If your payroll switch occurred before or after a move, the RSU income might not be reported accurately. This misalignment can happen if, for example, the company’s payroll system was updated before or after your relocation, causing a mismatch between your actual workdays and what is reported for tax purposes.

3. Correcting Reporting Issues:
   To avoid double taxation and accurately report to the right tax jurisdiction, the method of correcting the reporting will depend on your particular situation and the taxing jurisdictions involved.  Typically, discrepancies can be correcting by either:

• On your tax return: If the payroll reporting doesn’t match your actual RSU source or vesting, you may need to adjust it on your tax return.

• Through payroll: If feasible, you can work with your payroll department to get a corrected wage statement (ex: Form W-2c).

4. Adjusting RSU Basis:
   The basis of your RSUs (the amount taxed) may need to be adjusted based on how your company and brokerage firm reported the income. Be sure to verify the amount that was already taxed as ordinary income on your W-2. This will impact your capital gains tax when you sell the RSUs.

5. Underwithholding and Supplemental Income:
   Underwithholding on RSUs is common because the default statutory withholding rate for supplemental income (which includes RSUs) is typically 22% at the federal level. However, depending on your overall income and therefore, your marginal tax rate, this rate may be insufficient. For higher-income earners, the statutory withholding rate could be lower than their actual tax liability, leading to underwithholding. In such cases, you may owe additional taxes when you file your return. It's important to review your withholding and, if necessary, adjust it to prevent unexpected tax bills or penalties at year-end.

In conclusion, the tax treatment of RSUs can be complex, especially when workdays, payroll switches, and company or brokerage reporting vary. Ensuring accuracy can prevent costly mistakes like double taxation and help you manage your RSU-related tax obligations effectively. Additionally, being mindful of underwithholding can save you from surprises, like the underpayment penalty, when it's time to file your taxes.