Fact Check: Are RSUs taxed as income?

Are RSUs Taxed as Income?

Introduction

The claim in question is whether Restricted Stock Units (RSUs) are taxed as income. This topic is significant for employees who receive RSUs as part of their compensation package, as it directly affects their tax liabilities. Understanding the taxation of RSUs involves examining when they are considered income and how they are reported for tax purposes.

What We Know

Taxation upon Vesting: RSUs become taxable when they vest, meaning when the shares are delivered to the employee. At this point, their value is treated as ordinary income by the IRS, similar to a cash bonus 3 8.
Inclusion in W-2 Income: The value of vested RSUs is included in the employee's W-2 income, which means it is subject to federal income tax withholding at ordinary income tax rates, rather than capital gains rates 9.
IRS Guidance: The IRS has provided guidance indicating that RSUs are considered wages for tax purposes. This includes federal income tax withholding and FICA (Federal Insurance Contributions Act) taxes 1 2 6.
International Considerations: For employees working outside the U.S., the tax implications can vary, and the IRS has issued specific guidance regarding how RSU income should be sourced for Social Security purposes 7.
Tax Reporting: Employees must report the income from RSUs on their tax returns in the year they vest, and they are responsible for paying taxes on the value of the shares at that time 8.

Analysis

The sources consulted provide a mix of official IRS documentation and interpretations from tax professionals.

IRS Memorandum: The IRS Office of Chief Counsel memorandum 1 is a primary source that outlines the tax treatment of RSUs, making it a reliable reference for understanding federal tax obligations. However, it is important to note that this memorandum is non-precedential, meaning it does not set a legal precedent but provides guidance based on existing laws.
Tax Advisory Articles: Articles from tax advisory firms and financial websites 3 4 5 9 offer practical insights into the taxation of RSUs. While these sources can be informative, they may also have inherent biases, as they often aim to attract clients seeking tax advice. Therefore, while they can provide useful summaries, their interpretations should be cross-referenced with official IRS guidance.
Conflicting Information: Some sources, such as those from KPMG 6 10, provide a corporate perspective on RSU taxation, which may reflect the interests of businesses in managing their compensation structures. This could introduce a potential bias in how the information is presented.
Lack of Comprehensive Coverage: While the sources provide substantial information about the taxation of RSUs, there is a lack of detailed discussion on how different states may treat RSUs for tax purposes, which could be relevant for employees in various jurisdictions.

Conclusion

Verdict: True

The evidence supports the conclusion that Restricted Stock Units (RSUs) are indeed taxed as income. Key points leading to this verdict include the IRS's classification of RSUs as ordinary income upon vesting, their inclusion in W-2 income, and the requirement for employees to report this income on their tax returns. The IRS guidance and various tax advisory articles corroborate this understanding, indicating a consistent interpretation of RSU taxation.

However, it is important to acknowledge that while the federal tax treatment of RSUs is well-established, variations may exist based on state laws or specific circumstances, particularly for employees working internationally. Additionally, the reliance on certain sources may introduce biases, and the IRS memorandum referenced does not set a legal precedent, which means interpretations could evolve.

Readers are encouraged to critically evaluate this information and consult with tax professionals for personalized advice, as individual circumstances may affect tax liabilities related to RSUs.