Huge tax bill? Your sell-to-cover election on your RSUs is likely the problem

Do you have a huge tax bill each year and don't know why? It's mostly likely coming from your sell-to-cover election on your RSUs.

Your sell-to-cover election defaults to 22% for federal taxes, which, depending on how much you make, it way too low.

Some companies don't allow you to change this, but many do. We cover how all this works in this video.

Transcript:

Let's talk about your sell to cover election on your RSUs. I'm Chris Kaminski, co-founder and partner with Consilio Wealth, where we specialize in working with tech professionals at Amazon, Microsoft, Meta, and Google.

Your sell to cover election is the automatic sale when shares vest to pay for taxes. This will pay for federal taxes, social security taxes, Medicare taxes, all of those things. If you have a hundred shares vest today and that's worth a hundred thousand dollars, you're going to owe tax on that. And take note that the value of the shares at vest is what creates taxable income, not the value at grant. So, if they granted you a hundred shares and it was valued at $80,000 and then by the time it vested,

It was valued at $100,000. $100,000 is what's struck as ordinary income that day you received it in that tax year. And then an amount of that is withheld for taxes. The default sell to cover is 22%. Pretty much everywhere you work, it's going to start at 22%, and again, sell to cover means 100 shares vested. They sold 22, probably a little bit more for some other taxes, security tax, et cetera.

Let's say they sold 30. So, you have a net deposit of 70 shares on your statement, and if you go into the transaction details, the trade confirmation of the vest, you'll actually see a hundred gross shares, a hundred thousand dollars, $30,000 or 30 shares was sold for taxes. And it's going to break out exactly where that went. And then your net deposit of shares is going to show 70 shares. Now that 22% might be the right number for you, given your tax bracket. might be horribly, horribly low.

At most companies, you can change the selection, but not all for Amazon employees, for example. It's at amazonstock.com. For Microsoft employees, for example, it's in your rewards portal. For Meta employees, you do this in Workday. So, there's various ways to change it.

Every company is a little bit different, but most companies, most big companies in particular, do allow you to change the selection. When prospective clients reach out to us and wonder why they have such a big tax bill, this is almost always why. Because a lot of their compensation comes in stock, and it's only withheld at 22% federal income tax. So we're constantly running tax projections for our clients saying, okay, we're halfway through the year. Your first two vests were at this price. Your next two, we don't know what price is going to be, so let's just make an assumption. Here's your estimated withholdings based on what we have you enrolled in. Then are you going to have a tax bill or actually pay too much?

In order to do this on your own, you would need to run a tax projection. If you're working with a CPA or a tax professional, they can probably run this for you. Or if you're working with a wealth management company like ours, we can run this for you. It's not uncommon for us to change the sell to cover election up to 30, 35, even 37% for a lot of our clients. This is key because as you have more stock-based compensation, that's only at 22%, this can create a massive tax bill at the end of the year. Generally, in order to adjust yourself to cover election, you have to be in an open trading window because it is a material change on your stock. If your window was closed and you chose to reduce your tax withholdings, you're keeping more stock, and that could be subject to material non-public information, but you can't make that change during a closed window.

Generally, you don't have to worry about this because if you go into your portal, it won't even let you make a change if your window is closed. But just take special note, if you are subject to trading windows, just make sure that you aren't making these changes. If for some reason your portal lets you, just don't do it during a closed trading window. Okay, one other note about supplemental compensation.

Supplemental compensation is bonus and stock compensation. So, compensation that you've received above your base salary. And over the course of the year, once those three components, so now your base salary, your cash bonus, and your vested stock, once your total compensation goes over a million in a calendar year, your supplemental compensation, which is probably going to be your stock for the remainder of the year is required to be withheld at 37%.

This is an IRS mandated requirement. Here's the trap that a lot of our clients fall into. They're at the default 22% and then their income crosses over a million and then it jumps to 37%. But depending on how much your income is over a million, you might not have enough withheld at 37% to offset the under withheld at 22% on that first million.

So again, just take special note on running a tax projection to see what you'll owe so that you're not paying massive tax bills with massive penalties over the course of the year. All right, you are now an expert in sell to cover elections.