(4 minutes to read)
Once again, in the 2024 CompTIA annual State of the Tech Workforce study, California topped the list of states for most people working in the tech sector. Tech is a big industry in California, with CompTIA reporting net tech employment of 1,533,554 people for 2023. Many of these employees work for publicly traded and large privately held companies that offer restricted stock units (RSUs) as part of their compensation package.
California has its own income tax withholding rules on RSU income—and the state also has some of the highest income tax rates in the nation, depending on your income bracket, with a top tax rate of 13.3% for single taxpayers with income over $1 million. This means that if you work in tech in California and receive RSUs as part of your compensation, it’s important you learn more about how the rates and rules may impact you.
First, a refresher. RSUs are a special form of compensation in which the company agrees to give you company stock in the future, once certain conditions are met. Those conditions are typically time based, meaning that the company releases shares to you monthly or quarterly if you are still working for the company. This release of shares is also known as vesting. Some companies tie vesting for some shares to performance metrics as well.
Each RSU is typically equivalent to one share of the company’s stock, and therefore the value of an RSU is equal to the value of one share of company stock. When RSUs vest, the company exchanges each RSU for one share of company stock and deposits it in a brokerage account for the employee. RSU grants are usually for multiple RSUs; for example, an employer may grant you 720 RSUs, which vest monthly over three years, meaning you will receive 20 shares of company stock each month for 36 months. RSUs should not be confused with stock options, though, which are completely different. (You can read more about how RSUs work in “RSUs 101—A Quick Refresher,” “Pre-IPO Tech Giants Using “Double-Trigger” RSU Vesting to Attract Talent,” and “Cashing Out RSUs: Dodging Tech Stock Disasters by Diversifying.”)
Both the Internal Revenue Service (IRS) and Franchise Tax Board (FTB), the California equivalent of the IRS, consider the shares you receive when RSUs vest as taxable income. The amount of income is equal to the market value of the shares you receive; for example, the number of shares vested and delivered to your brokerage account times the company’s stock price when the shares were delivered to you. RSU income is considered compensation income, which means in addition to income tax, it is subject to payroll taxes just like your regular salary or wages including taxes for federal Social Security (6.2% up to income limit) and Medicare programs (1.45%–2.35%, depending on your income), and California State Disability Insurance (SDI; 0.9%).
In prior years, the amount of income subject to SDI was capped at an upper limit. For example, in 2023, the required contribution was 0.9% on annual wages (including RSU income) up to $153,164, for a maximum of $1,378.48. But in a stealth tax increase that will impact many Californians with RSU income, a new law in California effective for 2024 removes that wage cap on SDI taxes. Now, beginning on January 1, 2024, all income is subject to the mandatory 0.9% contribution, effectively imposing a new tax on income (including RSU income) above $153,164. For many tech employees whose income is already above or close to the previous income cap, the new law has the effect of adding a nearly 1% additional tax on RSU income.
That’s just payroll tax. For income tax, there are a couple more rules to be aware of. Both the IRS and FTB require that employers withhold income tax on RSU income. The rates at which your company is required to withhold money for tax may not exactly match the amount of tax you will actually owe when you file your tax returns (federal and state). The discrepancy surprises tech employees with RSU income every year, and this past year was no different. For federal income tax, companies must withhold tax from the RSU income you receive either at a rate of 22% or a rate based on a more complicated formula, which you can read more about in our recent article “How Are RSUs Taxed?” This amount of withholding may not be enough if you’ve had a lot of RSU income during the year, and you may wind up owing more tax at tax time.
The same can happen with your state taxes in California. For California state income tax, the amount the company is required to withhold on RSU income is simple: it’s 10.23% of the RSU income. With California’s top tax bracket reaching up to 13.3%, this amount of withholding may not be enough in a year where you had a lot of RSU income, either because you had a large RSU grant vest, or the company’s stock price went up substantially (I’m talking to you, Nvidia people!).
If you work in tech in California and receive income from RSUs, be sure to keep an eye on your income tax withholdings to make sure you’re paying enough tax during the year through paycheck withholdings and possibly estimated tax payments, to avoid being surprised next April when you file your tax returns. Also, be aware of the extra tax drag beginning this year from all your RSU income being subject to the SDI mandatory contribution. The net amount you receive with your RSUs may not be as big as you were expecting.
Parkworth Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you want help properly managing your RSUs and using them to build wealth, schedule a complimentary consultation.
