How Much Are RSUs Taxed in California?
Restricted Stock Units (RSUs) are a popular form of employee compensation, particularly in the tech industry. RSUs provide employees with a stake in the company’s stock, often as part of their overall compensation package. However, understanding how RSUs are taxed in California can be complex. In this article, we will explore the taxation of RSUs in California and answer some frequently asked questions.
Taxation of RSUs in California:
1. Granting of RSUs: When RSUs are granted to an employee, they are not taxable events. This means that the employee does not owe any taxes at the time of grant. These RSUs are considered “unvested” until certain conditions are met.
2. Vesting of RSUs: Once RSUs have vested, they become taxable. Vesting typically occurs when the employee has satisfied certain conditions, such as remaining employed with the company for a specific period of time. The value of the vested RSUs is subject to ordinary income tax rates.
3. Withholding taxes: When RSUs vest, the employer is required to withhold taxes on the value of the vested RSUs. The withholding rate is based on the employee’s income tax bracket and includes federal, state, and local taxes. In California, the state tax rate is progressive, ranging from 1% to 13.3% depending on the employee’s income.
4. Selling RSUs: When an employee sells their vested RSUs, they may be subject to capital gains tax. The amount of tax owed will depend on the length of time the RSUs were held before selling. If the RSUs were held for less than one year, they are subject to short-term capital gains tax, which is taxed at ordinary income tax rates. If the RSUs were held for more than one year, they are subject to long-term capital gains tax, which has lower tax rates.
5. Alternative Minimum Tax (AMT): Employees who receive a significant amount of RSUs may be subject to the Alternative Minimum Tax (AMT). The AMT is a separate tax system that ensures taxpayers pay a minimum amount of tax. It is calculated by adding certain tax preference items to the taxpayer’s regular taxable income. RSUs can be included in these preference items, potentially increasing the taxpayer’s AMT liability.
Q: Are RSUs taxed at the same rate as regular income in California?
A: Yes, the value of vested RSUs is subject to ordinary income tax rates, which range from 1% to 13.3% in California.
Q: Can RSUs be taxed twice in California?
A: No, RSUs are not subject to double taxation in California. Once the RSUs are taxed as ordinary income upon vesting, any subsequent gain or loss from selling the RSUs is subject to capital gains tax.
Q: Are there any tax advantages to holding RSUs for a longer period of time in California?
A: Yes, if RSUs are held for more than one year, any gain from selling them will be subject to long-term capital gains tax rates, which are generally lower than ordinary income tax rates.
Q: Are there any deductions or credits available for RSU taxation in California?
A: California does not provide specific deductions or credits for RSU taxation. However, employees may be able to take advantage of other tax deductions or credits available to all taxpayers.
Q: What happens if an employee forfeits their RSUs before they vest?
A: If an employee forfeits their RSUs before they vest, they will not owe any taxes on those RSUs. However, they will lose the value of the RSUs.
In conclusion, RSUs are subject to taxation in California upon vesting. The value of the vested RSUs is taxed as ordinary income, while any gain from selling the RSUs is subject to capital gains tax. It is important for employees with RSUs to understand their tax obligations and consult with a tax professional for guidance.