RSU taxes during IPO

[vdong]

Hi folks,

Have a question regarding what would happen in the following scenario.

I get granted double triggering RSU's by my employer. In the year 2020, I reside in NYC and receive 100 shares. In the year 2021, I vest 25 shares in NYC (living there for only 3 months) and then move to Seattle and vest 75 shares (living there for 9 months). I then vest another 25 shares (3 months) in Seattle and then move back to NYC to vest another 75 shares (9 months). At this point in 2022, there is an IPO for my company and each share is worth $10 now.

Does it matter that I vested 100/300 shares in Seattle and likewise 200/300 shares in NYC or will it be all seen as I vested 300 shares in NYC since that's where I was for the IPO? How much will I owe in state taxes from the IPO?

[DawnC]

Make sure your employer is withholding the correct state taxes when you move.  You will be able to allocate your income when you complete your state tax return(s).  When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.   Some of the income is earned income and some of it is unearned income.  

Since stock you receive through stock grants and RSUs is essentially compensation, you'll usually see it reported automatically on your W-2. Typically, taxes are withheld to go against what you might owe when you do your taxes. As with all withholding, the taxes your employer deducts from your paycheck may not be enough to cover the full amount of tax you owe when you file your return.  You will owe federal and state tax.  For state tax purposed, the compensation portion is allocated like other earned income, tax being paid to the state you earned the income in. 

How do I allocate (split) income for a part-year state return? 

You'll likely have to pay taxes again if you sell stock you received through an RSU or a stock grant. After you pay the income tax on the fair value of your stock, the IRS taxes you the same as if you bought the stock on the open market.   You will receive a 1099-B for the sale and for state tax purposes, this would be unearned income.  Here are the different ways you can be taxed:

• If you sell the stock at a higher price than its fair value at the time of vesting, you'll have a capital gain -  See directions for allocating unearned income in the link above. 
• If you hold the stock for less than one year, your gain will be short term, and you'll owe ordinary income tax on it
• If you hold the stock for one year or more, your gain will be long term, meaning you'll pay tax at the more favorable capital gains rate 

How to Report RSUs or Stock Grants on Your Tax Return