How to avoid the biggest tax-return mistakes with restricted stock or RSUs
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There's a lot going on right now. The last thing you want is headaches with your IRS tax return. Tax returns involving stock compensation are complicated, whether the income is from stock options, restricted stock units, an employee stock purchase plan, or sales of company shares acquired from equity comp. The special reporting issues can flummox even experienced accountants and financial advisors. Meanwhile, mistakes can lead to overpayment of taxes or (perhaps even worse) unwanted attention from IRS auditors.
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What are the biggest mistakes with restricted stock or RSUs that I can make on my tax return, and how can I avoid them?
Most of the mishaps concern reporting stock sales on IRS Form 8949 and Schedule D of IRS Form 1040 or misinterpreting your Form W-2. (For more on that topic, see a related article.)
1. After selling any or all of the shares at vesting, you still need to report this sale on Form 8949 and Schedule D even though you have no "gain" beyond what is part of your compensation income. You may, however, have a small gain or loss, depending on how your company calculates the stock value at vesting and any commissions and fees for the stock sale. (For an annotated example of how to report the restricted stock sale on these forms, see another FAQ.)
Alert: If the IRS were to receive a report of your gross sale proceeds from your broker (on Form 1099-B) but without a corresponding report of the sale on your Form 8949, the IRS would think you had failed to report the gain on the sale. Assuming a tax basis of $0, the IRS computers would then automatically send you a notice for the taxes due on the full amount of the proceeds.
2. Your cost basis for reporting the stock sale in column (e) on Form 8949 is the amount of compensation income at vesting that appeared on your W-2 (you already reported it on your tax return), even though you never purchased the stock. If you made a Section 83(b) election (not available for RSUs), the basis amount is the value at grant on your W-2. Do not assume that, because you did not pay any money to purchase the stock or exercise anything, your tax basis is zero. Otherwise, you will pay double tax on the value of the shares at vesting. For the cost basis, Box 1e of your 1099-B may be blank (or show $0) only because brokers are not required to report the cost basis for noncovered securities, such as restricted stock and RSUs (some brokers may report the basis on the 1099-B that you receive but not on what they report to the IRS). See a related FAQ with annotated diagrams of Form 8949 and Schedule D that show how you report stock sales after you have held the stock at vesting.
3. You will also mistakenly double-report income if you do not realize that your W-2 income in Box 1 already includes stock compensation income. What your company may have reported in Box 14 of Form W-2 does not change the Form 1040 reporting. Wrongly thinking the income was left out of Box 1 may prompt you to erroneously report it as "Other income" on Schedule 1. Doing that would cause the income to be taxed twice as ordinary income, as it was already included in the W-2 income reported on Line 1 of Form 1040.
4. If you surrendered or sold shares at vesting to pay the withholding tax, you want to report any actual market sale of shares on your Form 8949. For a share surrender in which you receive only the net after-tax shares in your account, speak with your own tax advisor about the need to report this (see a related FAQ on the issue). Alternatively, if you sold only some of the shares (e.g. for taxes), you don't want to report on your Form 8949 the cost basis for all the shares vested. This would result in a much larger tax basis and a capital loss for these shares sold.
Alert: When you later sell the remaining shares in your grant, remember to exclude from your Form 8949 at that time the shares used earlier to withhold taxes (i.e. do not use the full number of granted shares). Otherwise you'll report more shares than you sold, as explained in a related FAQ.
For other big mistakes to avoid, see the full FAQ at myStockOptions and our upcoming tax-return webinar on March 11.
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What are the top 10 questions I should ask before I report my stock sales on my tax return?
SPECIAL WEBINAR: Join us for our tax-season webinar on March 11 (2pm ET, 11am PT).
If you sold shares during the tax year, you must report the sale on your tax return. Special issues arise with shares that were acquired from stock options, restricted stock, restricted stock units (RSUs), performance share grants, an employee stock purchase plan (ESPP), or stock appreciation rights.
Below are 10 questions you should ask to be sure that you report your stock sales accurately and avoid costly mistakes that attract the attention of the IRS. For this website's full range of tax-related articles and FAQs, see the Tax Center.
1. Have I received IRS Form 1099-B from my broker? The reporting on Form 1099-B, which brokers often send in their own reformatted substitute statement, shows how much you received from securities sales during the prior tax year, including proceeds from shares you acquired through stock compensation. You use that amount, along with your cost basis, to calculate your gain or loss for tax purposes on IRS Form 8949 and Schedule D of your IRS Form 1040 tax return. Form 1099-B or the equivalent substitute statement is necessary for the accurate completion of your tax return.
2. What is the cost basis for calculating the gains from sold shares that I acquired from stock compensation?
3. In the cost basis I use to report sales of company stock on my tax return, what part comprises the W-2 income from stock compensation or an ESPP?
4. What if the wrong cost basis is reported on my 1099-B? How do I report the right cost basis on Form 8949 of my tax return?
5. How do I actually enter the information when I report stock sales on IRS Form 8949 and Schedule D? A special section in the Tax Center on this website has FAQs with examples and annotated diagrams of Form 8949 and Schedule D that show how you report sales of shares acquired from:
- nonqualified stock options
- incentive stock options
- restricted stock, RSUs, or performance share grants
- stock appreciation rights
- employee stock purchase plans
For the next five questions to ask, see the full FAQ at myStockOptions.com.
The list below summarizes our exclusive articles, FAQs, diagrams, videos, and podcasts on tax-return topics relating to stock compensation.
ARTICLE: Tax Season 2021: What You Must Know About New Reporting Rules
Ready or not, tax-return reporting has changed yet again for the 2021 tax-return season. Meanwhile, the impact of the 2018 changes in tax rates and brackets continues. For employees with 2020 income from stock compensation or sales of company stock, this article explains all of the changes you need to know.
ANNOTATED DIAGRAMS OF FORM 8949 AND SCHEDULE D: How To Report Sales Of Company Stock
Understand how to report your sales of company stock on Form 8949 and Schedule D of IRS Form 1040. Our comprehensive guide to tax-return reporting features our popular FAQs with annotated diagrams of the IRS forms. Covered topics include sales of stock from nonqualified stock options, incentive stock options, restricted stock, restricted stock units, performance shares, employee stock purchase plans, and stock appreciation rights.
ARTICLE: 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
Puzzled by your W-2 or 1099-B? Don't know how and where to report sales of company stock on your tax return? Get insightful tips to avoid errors that can prove costly!
ARTICLE: Restricted Stock & RSUs: 10 Tax-Return Mistakes To Avoid
Restricted stock or restricted stock units (RSUs), whether granted along with or instead of stock options, bring their own special issues to your tax return.
FORM W-2 DIAGRAMS: Understand how stock compensation is reported on your Form W-2. Our comprehensive guide to tax-return reporting includes our popular FAQs with annotated diagrams of Form W-2 for all types of equity awards and ESPPs.
VIDEO: Tax-Return Reporting Of Company Stock Sales: How To Avoid Overpaying Taxes
In plain English, the tax experts at myStockOptions.com discuss the rules for reporting stock sales on your tax return, along with major errors to avoid if the shares you sold came from stock options, restricted stock/RSUs, stock appreciation rights, or an employee stock purchase plan. The video demystifies the "cost basis" of shares acquired from equity compensation and explains why it is crucial to understand your cost basis to avoid overpaying your taxes. (Running time: 8:05)
VIDEO: Tax-Return Forms & Reporting Rules For Stock Sales
If there's a way to make learning about tax forms fun, we'll try it. In this engaging video, learn how to prevent costly tax return mistakes with our animated presentation on IRS Form 1099-B, IRS Form 8949, and Schedule D. (Running time: 8:08)
ARTICLE: Avoid Overpaying Tax On Stock Sales: Understand Forms 1099-B And 8949 For Tax-Return Reporting
Cost-basis reporting, both for your broker on Form 1099-B and for you on your tax return, is now more complex, confusing, and vulnerable to errors. If you are not aware of the reporting rules, the resulting confusion may lead you to pay more taxes than you have to. This article explains how to avoid mistakes.
PODCAST: Reporting Stock Sales On Your Tax Return
In this engaging audio, you can get the latest on Form 1099-B, Form 8949, Schedule D, and other tax-return topics involving stock compensation.
PODCAST: Tax Return Tips & Avoiding Reporting Mistakes
Listen to this audio to learn about the tax-return reporting for stock compensation and how to avoid expensive mistakes that attract unwanted IRS attention.
ARTICLE: NQSOs: Tax Return Tips And Traps
Whether you complete your own tax return or just want to review what your tax preparer did, it's important to understand basic reporting requirements for nonqualified stock options. Learn what you need to report on your tax return at each stage of the NQSO life cycle.
ARTICLE: ISOs: Tax Return Tips And Traps
Incentive stock options bring special complexities to tax returns, especially when the alternative minimum tax is involved.
ARTICLE: Restricted Stock And Stock Options: Financial Planning After Your Tax Return Is Filed (Parts 1 and 2)
The time just after the filing of your tax return is ideal for big-picture financial planning. You can more accurately project your income and likely tax situation for the remainder of this year and the next, including AMT risk and capital-loss carry-forwards, to develop your strategy.
In addition to these resources, myStockOptions.com has numerous FAQs on tax-return topics, including a helpful FAQ on a range of ESPP tax-return mistakes.
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TIME: March 11, 2:00pm–3:15pm ET, 11:00am–12:15pm PT
Registration is now open at the webinar homepage
Tax-return reporting has changed yet again for the 2021 tax season, including for capital gains, alternative minimum tax (AMT), and estimated taxes. This tax season brings more risk than ever for expensive mistakes with tax returns involving stock compensation, including cost-basis reporting for stock sales.
Join us on March 11 (2:00pm–3:15pm ET, 11:00am–12:15pm PT) for a lively educational webinar on tax-return topics for stock comp. Understand the rules of tax-return reporting for stock options, restricted stock/RSUs, ESPPs, and sales of company shares. Learn how to avoid the common mistakes that can lead to overpaying taxes or unwanted IRS attention.
This webinar is presented in 75 fast-paced minutes by Bruce Brumberg, Esq., editor-in-chief and co-founder of myStockOptions and a Forbes.com contributor.
TOPICS INCLUDE
- Review of tax treatment for equity comp
- Changes in tax-return reporting that apply to stock comp
- Errors with cost-basis reporting that can lead to overpaying capital gains tax
- Key forms needed to report income and stock sales on IRS Form 1040, Form 8949, and Schedule D
- Avoiding double-counting of W-2 income from options, restricted stock/RSUs, and dividends
- Ensuring AMT from ISO exercises is reported and what to do if it isn’t
- Preventing inaccurate calculation of ESPP income
- Checklist for reviewing your tax return before filing
CONTINUING EDUCATION
1.5 CE credit hours for (applications pending):
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- CPWA and CIMA
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QUESTIONS?Please contact the myStockOptions team at 617-734-1979 or webinars@mystockoptions.com.
Amid the upcoming tax-return season, don’t forget basic tax planning for 2021. At the start of each year, key numbers in many tax-law provisions are adjusted for inflation. Many of the adjustments are important for employees, their paychecks, and their basic tax planning for 2021. While the IRS and Social Security Administration announce these figures every fall, January is really when you need to pay attention to them.
Below are the top three sets of tax figures that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings. You can find in-depth content on all of these tax topics in the Tax Center at myStockOptions.
1. The Social Security Wage Base
Social Security tax (6.2%) applies to wages up to a maximum amount per year set annually by the Social Security Administration. Income above that threshold is not subject to Social Security tax (by contrast, Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your compensation level). In 2021, the Social Security wage cap is $142,800, up slightly from $137,700 in 2020. This means the maximum possible Social Security withholding in 2021 is $8,853.60. Once your income is over that amount, you’ll see 6.2% more in your paycheck!
2. Your Income-Tax Bracket And Withholding
The table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate (i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket). This number tells you whether the taxes withheld from your salary according to your information on the revised Form W-4 will cover the total tax you will owe for 2021. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.
Income Tax Brackets And Rates In 2021
| RATE | TAXABLE INCOME (SINGLE) | TAXABLE INCOME (JOINT) |
| 10% | $0 to $9,950 | $0 to $19,900 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 |
| 37% | more than $523,600 | more than $628,300 |
As shown by the table above, once you know your marginal tax-bracket rate, you may find the flat federal withholding rate of 22% on supplemental wage income, such as from NQSO exercises or restricted stock/RSU vesting, may not cover all of the taxes that you will owe. In that case, you must either put extra money aside for the 2021 tax return you will file in 2022, pay estimated taxes during 2021, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall.
3. Your Contribution Limit For Qualified Retirement Plans
In 2021, you can elect to defer up to $19,500 from your paychecks into qualified retirement plans, such as your 401(k). The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $58,000 in 2021, a $1,000 increase over last year’s amount. Both of these limits are $6,500 higher if you are 50 or older. The amount of compensation income that can be considered in the calculation for qualified deferrals rose to $290,000 in 2021. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.
Here are IRS resources with more details on the many adjusted 2021 tax numbers:
- Revenue Procedure 2020-45 gives inflation adjustments in various income-tax-related provisions.
- IRS Notice 2020-79 and an IRS table give the annual adjustments related to various tax-qualified retirement plans.
| myStockOptions Learning Center offers convenient continuing education (CE) credits |
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35 CE credits for Certified Equity Professionals (over 100% of the total requirement)
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Potential self-reportable CPE for Certified Public Accountants (CPAs) and CE for CFA Charterholders (see the Learning Center for information)
Each course of study features podcasts, articles, and FAQs from myStockOptions.com. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.