Tech Employee Stock Benefits Could Bite Back at Tax Time, Advisors Say (2024)

Tech stocks have been booming—but employees who are compensated in company shares may want to consider how their gains could impact their tax bill.

Shares of Nvidia (NVDA) are trading 200% higher than at the start of the year, while Amazon's (AMZN) up about 55%, Apple (AAPL) has gained 47%, and Microsoft (MSFT) has moved 44% higher, among other tech stock gains this year. Employees who received Restricted Stock Units (RSUs) that will vest this year as a part of their compensation package are seeing huge gains as a result—but may be surprised by a bigger tax bill next year.

“Often the amount of withholding is not enough, especially when prices run up, so it comes tax time and you find out, ‘Hey, I’m in the highest tax bracket possible, and my withholding is for 20% or 25%, and now I have to write a big check,'” said David Amann, a Redwood City, Calif.-based financial advisor with Edward Jones who serves clients in the tech industry.

Taxes on RSUs are Simple, But Can Surprise

RSUs are one way that companies, especially tech firms, pay their employees with stock, whether at hiring, as part of a performance bonus, or with an annual compensation package.

Like in some other employee-benefit programs, the employee won’t take ownership of the stock until it is vested after a certain period of time. Typically, vesting schedules are for four years, with a quarter of the shares vested after each year.

As far as their tax treatment, RSUs are fairly simple. The shares are treated as “ordinary income,” the same as a cash bonus based on the value of the shares on the day they are vested.

But with many tech stocks soaring, employees of firms like Nvidia, Microsoft and Apple may be underestimating the taxes owed on this type of employee stock benefit.

Two things often happen, Amann said. First, an employee fails to account for withholding on the RSU, which can amount to 20% or more in tax obligation of the award’s value. But what can be more surprising for employees is when the value of the RSUs pushes them into a higher tax bracket, requiring an even greater amount of overall tax obligation than they had prepared.

Ashley Francis, a Seattle-based tax planning and financial advisor at the Francis Group, suggested financial advisors with clients at tech firms reach out to them now before tax season reveals that their clients weren’t properly prepared.

“RSU vesting throughout this year is going to have a wild impact on the final 2023 tax bill,” Francis wrote on Twitter. “Maybe a good idea to reach out and start having discussions now before some unhappy discussions later.”

How to Treat RSUs Depends on Long-Term Goals

How tech employees want to treat their RSUs when the vest is best determined by their overall financial goals, Amann said, since it is similar to a cash bonus. If employees hold the shares, any gains made on the stock are taxed for capital gains.

“The mistake most people make with RSUs is they don’t realize they are taxed immediately on it,” Amann said. “Is this going to be used for a new home or is it going to be used for your retirement? That will affect your decision on when to sell and how to sell.”

Beyond the tax implications, Amann also said any company employee may want to consider selling RSU shares to diversify their portfolio in order to protect against any sudden downturn in stock.

Make Simple Adjustments if They Are Available

Most RSU plans account for federal tax withholding, usually 22%, but between the significant gain in share prices of the stocks, on top of significant salaries, many tech employees find themselves in the 32% tax bracket, said Joey Loss, financial planner for Flow Financial.

“This gap can create a big surprise tax bill at the end of the year, plus potential penalties for late payment,” Loss said.

Some companies allow supplemental withholding on stock vests, like Google (GOOGL) and Meta (META), where employees can adjust the withholding over the typical 22% amount, said Rachel Elson, a financial advisor for Perigon Wealth Management.

“At minimum, do some calculations yourself,” she said. “Sell enough to cover that extra tax bill, and stash the cash in high-yield savings.”