RSU Taxes: Why Your W-2 and 1099-B Don't Match (And What to Do)
Shankar Subramanian, CPAA common and costly mistake: reporting RSU sales without counting the income you were already taxed on when the shares vested. Here is how to avoid paying tax twice.
Restricted stock units (RSUs) are shares your employer gives you over time. They are a great benefit, but they create one of the most common errors we fix on tax returns.
Tax step one: when the shares vest
On the day your RSUs vest, the value of the shares counts as pay. It shows up in box 1 of your W-2, along with your salary. Your employer usually withholds tax by selling some of the shares ("sell to cover").
Watch the withholding rate. Employers often use the flat 22% rate for extra pay like this (37% on extra pay above $1 million in a year). If you are in a higher tax bracket, 22% is not enough, and you may owe more when you file.
Tax step two: when you sell
When you sell the shares, your broker sends a Form 1099-B. This is where the trouble starts.
Your cost basis, the amount you are treated as having paid, is the value of the shares on the vest date. You already paid income tax on that amount through your W-2. But many brokers show the basis on the 1099-B as $0 or leave it blank for RSU shares.
If you enter the 1099-B as it is, the whole sale price looks like a gain. You end up paying tax on the same money twice.
How to fix it
- Find your supplemental statement. Most brokers (for example, the stock plan sites used by large employers) provide a "supplemental" or "adjusted" cost basis statement with the correct numbers.
- Report each sale on Form 8949 with the correct basis, using the adjustment code the instructions call for when the basis on the 1099-B is wrong or missing.
- Check the sell-to-cover sales too. The shares sold for withholding are also reported on a 1099-B and need the same fix.
Short term or long term?
Your holding period starts on the vest date. Shares sold within a year of vesting are short-term gains, taxed like regular pay. Shares held more than a year get the lower long-term rates.
Plan ahead
If you get large RSU grants every year:
- Raise your W-4 withholding, or make estimated payments, to cover the gap above 22%
- Decide ahead of time whether to sell at vest or hold, based on your goals and risk
- Keep every vest and sale confirmation in one folder
We review RSU sales line by line for clients, including energy company and tech employees here in Houston.
Sources: IRS Form 8949 instructions and IRS Publication 525.
Want help with this?
Book a free 30 minute call with Shankar. We will look at your numbers and make a plan that fits you.
