Restricted Stock Units: Sell To Cover- Where Do The Funds Go?

sams1985 | Jul 10, 2023 | 781 posts since 2022

This is prob a stupid question but i'm absolutely new to the world of RSU's and figured this was the place to get a good explanation. I think i understand what sell to cover means, it seems inherently straightforward but what happens afterwards?

Will Fidelity sell just enough stock units to cove all employment taxes incurred by the distribution? Will that reflect on the W2? Where does the sell to cover funds go? Are they automatically withheld (and thus will reflect on the w2?) or will the funds be disbursed to my fidelity account and then i have to subsequently use t hem to pay 1040 EST tax in the quarter they were disbursed?

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Answers

Reader1 | Jul 11, 2023 | 51 posts since 2018

@sams1985, Fidelity provides the following explanation for payment of taxes on RSU's due at vesting (please note the third option):

"How do I pay taxes on restricted stock units?

Depending on plan rules, you have three options to meet your tax withholding obligation due at vesting:

Net shares
If you elect to net shares, the appropriate number of shares are withheld at vesting to cover the tax withholding obligation. You retain the number of shares vested less the number of shares withheld for tax purposes.

Pay cash
If you elect to pay cash to satisfy your tax withholding obligation, you must have the appropriate amount of cash in your account on the day of vesting. The money will be debited from your account upon vesting, and will be forwarded to your company for reporting and remitting to the appropriate regulatory agencies. You retain the full number of shares that vested.
If you choose to pay your withholding obligation with cash from your Fidelity Account, please note that you must have cash in that account on the vesting date to avoid having your account restricted. Electing to pay for the estimated tax withholding with cash does not fund your account.

Sell to Cover
If you elect to sell to cover, you are directing Fidelity Stock Plan Services to sell a portion of your vesting shares to cover your tax withholding obligation and any applicable commissions and fees. Proceeds from your sale will be debited from your account and will be forwarded to your company for reporting and remitting to the appropriate regulatory agencies. You retain the number of vested shares less any shares sold for tax withholding, commission and fees. "

For more information, you can refer to their RSU help contents page here:
https://www.fidelity.com/webcontent/ap002390-mlo-content/20.04/help/learn_rsus.shtml#paytaxes

CDMD | Jul 13, 2023 | 141 posts since 2022

Good question and great answers. The only other points I would add are as follows:

1) the form Rickny references is proof of your cost basis and is needed for gains / loss calculations for your income taxes when you sell the shares. Very important doc. I have typically sold the number of shares both short and long term equal to the vesting amount to match the share count and tax lot for capital gain / loss calc audit trail for your schedule D. Makes it easier to prove if you get audited by the irs.

2) the decision to use net shares or pay cash is really an investment decision based on your desire to either hold the shares for potential gains in the future as you might think the share price might go up ( maybe you like the price per share at vesting) with upside potential hence pay cash to maximize shares you will own. Or not and use the net shares method. This would be used when you intend to sell. I used cash method when the share price was low in a down market and held shares for long term and sold when I thought the price was maximized. Of course assuming you had the cash to do so. I used net shares when I didn’t like the price so much too high and didn’t want to invest even more cash at that price.

3) I also always tried to decide if I would hold for at least a year to get the long term cap gains treatment. This also factored into my thinking of net shares vs cash

4) fwiw always double ck your payroll statement vs fidelity cost basis form to make sure they match. Needless to say errors can occur sometimes between the broker and employer. This includes if they withheld the right number of shares. I had an instance where the supplemental withholding rate was improperly used.

Hope this helps

CDMD | Jul 13, 2023 | 141 posts since 2022

Ps. The entire share holdings are controlled by your HR equity compensation team in conjunction with your payroll dept. note. might be two different groups within HR. Compensation will deliver the shares to Fidelity for record keeping purpose at award date. And at vesting payroll will withhold the cash for taxes from shares sold. If you pay cash. The cash is sent by you to payroll to cover the taxes. Either by check or auto deduct from a checking account you provide them usually the same account normal payroll is deposited to. And then compensation works with fidelity to perform the trade on your behalf. If you elect cash and don’t deliver the cash compensation will instruct fidelity to hold net shares. Not sure how this last aspect will go over with your HR team if you don’t deliver. Lol.
Last thought. Minor point. HR won’t deliver fractional shares to the broker. They will typically round down the share count and add the few extra dollars of the fractional shares value to tax withholding.

Rickny | Jul 13, 2023 | 1,296 posts since 2017

My wife has RSUs. The account is with Fidelity. Stock is sold to cover taxes. This was set up by employer that stock is sold to pay taxes.

Vested RSUs is compensation income (specifically supplemental income). Like bonus, the income from the RSUs is subject to employee tax withholding. The withholding requirements are satisfied by withholding sufficient shares for the applicable taxes. As a result, only the net, after tax, shares are deposited to your Fidelity account.

After and RSU vesting is processed the income and tax withholding amounts (i.e. value of shares withheld for taxes) are included in payroll and the relevant tax year’s W2.

Above 2 paragraphs from my wife's payroll department and specialist with RSUs.

Fidelity also has a a form they give us that shows the value of the shares, number sold to pay taxes. I think they mail a form but you can also get a breakdown via your brokerage account which holds the RSUs.

Rickny | Jul 13, 2023 | 1,296 posts since 2017

RSU grants are subject to withholding and also social security payments. My wife's plan they sell shares to cover these payments.

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