If you’re a Whole Foods employee, you might have received or will receive Restricted Stock Units (RSUs) of Amazon stock as part of your compensation. RSUs can be a great way to share in the success of the company, but they come with certain tax implications that you should be aware of.
Let’s break it down in simple terms.
What Are RSUs?
Restricted Stock Units (RSUs) are a type of stock compensation that your company offers. In simple terms, an RSU is a promise from Whole Foods to give you company stock at a future date, but only after certain conditions (called vesting) are met. This is typically tied to the number of years you stay with the company, which is designed to keep you motivated to stay and help grow Whole Foods’ success.
Think of it like earning a bonus for staying with the company. The bonus amount each year is tied to how the company stock is performing.
Vesting Schedule – Earning Your Shares
Whole Foods & Amazon RSUs usually come with a four year vesting schedule. Vesting is the process by which you actually earn the right to receive your shares.
Here’s an example:
- Assume you receive a grant of 100 Amazon shares.
- Your vesting schedule states the following:
- 5% after 1 Year: 5 shares received after 1 year of service
- 15% after 2 Years: 15 shares received after 2 years of service
- 40% after 3 Years: 40 shares received after 3 years of service
- 40% after 4 Years: 40 shares received after 4 years of service
- Shares are deposited into your brokerage account on the vesting date
- You decide whether to sell or keep your shares
If you leave the company before your RSUs have fully vested, you’ll lose any unvested shares.
Taxes: What Happens When Your RSUs Vest?
When your RSUs vest, it’s like getting a bonus. And just like a cash bonus, the value of your vested shares will be taxed as ordinary income (the same way you pay taxes on your paycheck).
For example, let’s say the value of your stock is $50 per share when your RSUs vest. If you vest 25 shares, the value of the vesting will be $1,250 (25 shares × $50 per share). This amount will be added to your income, and you’ll pay regular income tax on it.
Tax Withholding
Sell-to-Cover: On the vesting date, a portion of your shares will be sold to cover taxes. The remaining portion of shares (shares not sold) would be kept in your brokerage account.
Remember that the value of the shares you receive on the vesting date is treated as ordinary income by the IRS. It’s important to withhold taxes on this income to avoid a tax bill at the end of the year.
The default tax withholding percentage for “sell-to-cover” is usually 22%. Depending on your tax situation, this may not be enough to cover the taxes due. For example: If you are in the 32% marginal tax bracket, and the standard “sell-to-cover” tax withholding is 22%, then you would have a 10% tax shortfall from this RSU vesting event. You would need to submit this tax shortfall to the IRS as a tax payment. If you have questions on this, speak with your financial planner or tax professional.
After Vesting: Selling Your Shares and Capital Gains Taxes
Now, here’s where things get a bit more interesting. After your RSUs vest, you have the option to keep or sell your shares. If you hold onto them, and the stock price increases, you’ll face a different type of tax when upon selling the shares: capital gains tax.
Capital gains are the profits you make when you sell an investment (in this case, Amazon stock) for more than you bought it for. Here’s how it works:
- Short-Term Capital Gains – If you sell the shares within 1 year of vesting, your profits will be taxed at a higher short-term capital gains rate, which is the same as your ordinary income tax rate.
Example: You vest 25 shares at $50 each and hold them for six months. The stock price increases to $60 when you sell. Your profit is $10 per share ($60 – $50), and that $250 profit will be taxed like your regular income, which is generally higher than long-term capital gains taxes. - Long-Term Capital Gains – If you hold onto the shares for more than 1 year before selling, your profits will be taxed at a long-term capital gains rate, which is typically lower than the short-term rate. This is a nice way to save on taxes, but it requires holding the stock for longer.
Example: If you hold onto your 25 shares for 18 months, and the stock price rises to $70 per share, your profit is $500. Since you held the shares for more than a year, your $500 profit will be taxed at a lower rate, saving you money on taxes.
Tax Reporting:
Part 1: RSU Vesting Taxed as Income
Income earned from RSUs and tax withholding assessed will be reported on your W-2 tax form. You do not need to take any additional reporting steps here.
Part 2: Capital Gains When Shares are Sold
If you sold any Amazon shares throughout the year, you will also receive a 1099-B from the brokerage firm. The 1099-B will show your proceeds (value of shares upon sale) and your cost basis (the value of shares when you received them). The difference between these two amounts is your capital gain.
Important Note: When filing your tax return, you may need to manually adjust the “cost basis” amount reported on tax form 1099-B.
Review the 1099-B you received from the brokerage firm. If the Amazon lots you sold throughout the year are showing $0 for the cost basis, you will need to manually input the cost basis amount. Do not skip this step – If you leave the cost basis amount as $0, you will be taxed twice on this income.
If the cost basis amount is listed as $0 for your sold RSU shares, look for a “Supplemental Tax Document” form on the brokerage firm’s website. You will need to manually adjust the cost basis amount for each lot based on the information provided in this document. Send this document to your tax preparer or update the cost basis manually in the tax preparation software you are using (if self-prepared).
Key Things to Keep in Mind:
- You Pay Taxes When Shares Vest: When your RSUs vest, you’ll owe taxes on the value of those shares right away.
- You Can Sell-to-Cover Taxes: The default “sell-to-cover” tax withholding option may not be enough to cover the full tax impact.
- Decide whether to hold or sell your shares after vesting: Holding onto the stock for more than a year after vesting may save you money on taxes when you sell. However holding involves risk – if the stock price declines while you hold the shares, you would experience losses.
- Tax Reporting: Make sure the cost basis amount is being reported correctly when filing your tax return.
Why Does All This Matter?
Understanding the tax impact of your RSUs can help you plan ahead. If you sell the shares too soon, you could end up paying more in taxes. If you hold onto them for longer, you might pay less, however your risk increases (e.g. stock price may decline). It’s all about finding the right balance that works for your financial goals.
Final Thoughts
RSUs are a great way for Whole Foods to reward you for your hard work and loyalty, but it’s important to understand the taxes involved. As you receive your RSUs and they vest, remember:
- The vesting date is when the IRS sees your shares as “income.”
- Holding the shares for over a year could save you money on taxes, but it also involves risk (e.g. the stock price could drop).
If you’re ever unsure about what to do, or if you have specific tax questions, it’s always a good idea to speak with a financial planner or tax advisor. They can help guide you based on your personal situation.
