Finance at work
I am at a late stage startup or my company has already gone public. What are some ways I can save on taxes?
RSU (restrictive stock unit) taxation works the same way as RSAs (restrictive stock award) without an 83(b) election. We owe ordinary income taxes when our shares vest and pay capital gains taxes when we sell the shares.
However, one benefit of RSUs is that we don't have to pay for the shares upfront as we do with RSAs. Instead, the IRS considers the entire value of the RSU (shares x price) on the vesting date taxable which creates the problem of building up a large tax bill on the vesting date. This problem really hits home for employees of private companies who can't yet sell their shares to help pay for the taxes.
Fortunately, we can file an 83(i) election.
For an 83(i) to be effective, we need to file it within 30 days of the grant date of our RSU.
An 83(i) is a huge benefit for startup employees because it solves the problem of not being able to pay the income taxes owed when the shares vest. However, once the 5 year period is up, we will be on the hook for the deferred taxes. Since companies are staying private longer, some companies have implemented employee-friendly double-trigger vesting to give employees more than 5 years to prepare.
Facebook (Meta) is an example of a company that solved the RSU tax problem by applying double-trigger vesting.
Selling shares to cover taxes
If we work at a public company or if a liquidity event is planned for our startup, our shares can be freely sold to cover the taxes owed.
To pay for taxes owed on vesting shares, we can choose a strategy to sell to cover.
Sell to cover is a very popular strategy that is fully automated by brokerages. Meaning, all we have to do is to elect to turn it on and every time our RSUs vest, shares are automatically sold to cover the tax.
83(i)s for startup employees should be prioritized and filed right away before 30 days have passed. 83(i)s don't apply to employees at public companies since the shares are freely traded on the public exchanges.
While RSUs offer us more tax flexibility than RSAs or stock options, figuring out our income tax owed can be tricky. Tax can vary based on various factors such as holding RSUs or selling right away. If you need help, reach out to an expert on Archimedes today.
For extra insight, check out the video by expert Mike Zung, CFP® over on the Watch tab!