Taro Logo
0

How does Big Tech RSU works?

Profile picture
Entry-Level Software Engineer at Taro Community8 months ago

My question is: since I work for a big tech company, does the company pay the tax for my vested shares, or do I?

Do you guys have any resources that could help with this? I am worry about the the tax liability aspect. As well should I talk to a CPA to be safe in my decision.

206
7

Discussion

(7 comments)
  • 3
    Profile picture
    Coding Challenge Writer @ CodingChallenges.fyi
    8 months ago

    Get professional advice.

    Here in the UK they're taxed when they vest and you can usually elect to have enough sold to cover the tax bill, and either sell or hold the rest.

    Alternately you might elect to hold all of them and cover the tax out of pocket.

  • 3
    Profile picture
    Engineer @ Robinhood
    8 months ago

    (Assuming US) If you're getting RSUs that can be sold in a public market directly, it works like this:

    • Every vest, a % of your shares are withheld for taxes (this applies to your paychecks as well). The default (and the usual minimum) I see is 22%. So if you do nothing, 22% of your compensation is likely going to taxes proactively.
    • You able to change the withholding amount for your RSUs on the platform it's granted through. Keep in mind this can only be changed during certain time windows (usually right after earnings). You can bump this up to 37% (this is the maximum you'll ever have to pay in taxes).
    • At the end of the year, you pay (amount of taxes the IRS expect) - (amount withheld). If you overpay, you effectively give the government a 0% interest loan for what you paid extra. If you underpay, the government is effectively giving you a 0% interest loan on what you owe. If you underpay too much, the government will charge a small interest % on top of your missing taxes.
  • 0
    Profile picture
    Entry-Level Software Engineer [OP]
    Taro Community
    8 months ago

    (USA) Interesting....I want to avoid the 37% hike on my RSU vest schedule date.
    So basically it taxed at 22% anyways okay, Now I understand so this can't be avoid at all.

  • 2
    Profile picture
    Tech Lead @ Robinhood, Meta, Course Hero
    8 months ago

    If you're at Big Tech proper (i.e. one of the publicly traded ones, not a unicorn like Stripe), RSUs are counted as income as they're liquid assets. There's no way to avoid taxes on them because income tax is a thing (at least on the federal level), and if you work at Big Tech, you probably have a substantial state income tax as well (e.g. California's state income tax is pretty high).

    (USA) Interesting....I want to avoid the 37% hike on my RSU vest schedule date.

    Since you're a junior engineer, it's not likely you'll hit the 37% rate as I imagine your TC is between $150k - $225k. Once you get to L5+ (senior+) though like Jonathan and I have, you will probably hit that 37% income tax rate. However, you are definitely above the 22% rate as making more than $95k will do that.

    Anyways, here's what I think you should do:

    1. Set your withholding percentage between 27 to 35% - Go on the higher end if you live in a state with high state income taxes.
    2. If you're already paying for a CPA, talk to them - Figure out the optimal percentage. The best-case scenario is that you just underpay a little bit so you don't suffer a penalty and having cash upfront is always good. To take advantage of cash sitting around, either invest it or put it in a high-yield APY account. I personally use Robinhood Gold to get 4.9% APY.
    3. Go through relevant resources - I'll link Taro stuff below, but on top of that, I recommend talking to your parents and asking your coworkers.

    When it comes to Taro resources, I recommend these videos we made from RSUs:

    If you have more time, I recommend going through the entire pay masterclass we gave (it's where the above videos were clipped from): [Masterclass] Understanding And Optimizing Your Pay In Tech

    Tech compensation is really complicated, especially at Big Tech where there's so many components on top of salary. I have seen so many junior engineers fumble pay, and I was one of them (I foolishly assumed all equity-based compensation was stock options for a long time). It's really important to understand how tech pay works as this knowledge (or lack thereof) can affect thousands of $$$.

    As you get more questions, please ask them into Taro! I'm sure a lot of other community members (especially those earlier in career) have similar ones.

  • 3
    Profile picture
    Tech Lead @ Robinhood, Meta, Course Hero
    8 months ago

    As others have mentioned, RSUs are always partially sold off immediately to proactively cover the tax bill. I'll clarify it with an example that has very round numbers:

    • You are vesting $10,000 worth of shares, 100 shares valued at $100 a piece at vest time.
    • Your tax rate is 30%, and you have set the withholding to 30% properly.
    • The company will sell 30 of your shares ($3,000 worth) and send those funds to the appropriate tax bodies (US federal + state government).
    • You will get 70 shares ($7,000 worth) deposited into your account.
    • Since you set your withholding perfectly, you pay $0 in additional income taxes once tax season comes around.

    So that covers the income taxes portion, which all happens on vesting.

    Now let's talk about capital gains, which is what's relevant when you sell the vested shares at some point in the future. Let's say the 70 shares you got (worth $7,000 at time of vesting) grow to $17,000 worth ($10k increase). This $10k profit will be taxed differently based on timing:

    • If you sell within 1 year of vesting - This is short-term capital gains, which is taxed as income. This will probably be 25-35% as a junior Big Tech SWE in the US makes quite a lot, meaning the government will take between $2.5k and $3.5k of this money.
    • If you sell after 1 year of vesting - This is long-term capital gains, which will almost certainly be 15% for you (at the federal level). So the government will take $1.5k away, leaving your net profit at $8.5k. The next long-term capital gains bracket is 20% and requires $460k income (which 99.99% of L3s won't have).

    States can have capital gains tax as well. And again, California has a pretty high one. So your overall capital gains tax will probably be higher than the numbers I mentioned before.

  • 2
    Profile picture
    Tech Lead/Manager at Meta, Pinterest, Kosei
    8 months ago

    I have nothing to add to the great answers above, but I did want to say that many, many engineers in the US are surprised by their tax burden in April due to under-withholding.

    I haven't used them, but I've chatted with the founder of https://candor.co/ and I believe they automatically sell vested RSUs and help optimize taxes.

  • 1
    Profile picture
    Entry-Level Software Engineer [OP]
    Taro Community
    8 months ago

    Thank you and I also got the work email explaining the RSU vests tax break down. Now in the future am going to negotiate for more comp.