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Comment by aliston | Hacker News Reader

Employees get taxed on the value that they vest at IPO, but are locked up from selling for 6 months. The company withholds a percentage, effectively selling a portion at IPO, but it is less than the effective tax rate. I should clarify that this applies to RSUs, not options.

Edit: something similar can happen with options as mentioned, but the mechanics are slightly different.

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For RSUs the withholding should be in shares - if your effective tax rate is 40% and you vest 5 shares a month, they grant you 3 shares and immediately sell 2 to cover the taxes. If your effective tax rate was 30%, they'd round up, still sell 2 of them, but remit the cash in excess of taxes to your paycheck. At least that was how my Google shares worked. A higher IPO price works to your advantage, because the refund you get for fractional shares is worth more. You're also never in the position where you have to cover the (income) taxes for RSUs with cash from the stock sale, because the taxes have already been withheld in stock. You only have to pay capital gains when you sell.

Except most companies (including Google) withhold supplementary income at 22% federal plus FICA, regardless of whether your marginal bracket is 22% or 35%+.

Usually this results in significant underwithholding on RSU for federal tax.

Yup, had this exact fear during my IPO. Fortunately, stock went up, so it was a win that I was underwithheld.

I was and continue to be surprised companies release RSUs at IPO and not lock up expiry, the later of which avoids the tax risk.

Can you ask your employer to increase their RSU withholdings?

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