1. Overview

Restricted Stock Units (RSUs) are taxed upon vesting as ordinary income. Multi-state taxation complicates RSU income sourcing and reporting.

2. Tax Treatment

Federal Tax

• Taxed as ordinary income at vesting.

• Withholding: Federal income tax, Social Security, Medicare.

State Tax

• Most states tax RSUs as income.

• Tax sourcing depends on work location during vesting.

3. Multi-State Tax Rules

Sourcing Methods

• Time-based: Allocated based on work location between grant and vesting.

• Grant-date sourcing: Used in some states like CA.

Example:

John received RSUs while working in CA but moved to TX (no state tax) before vesting. CA may still tax a portion of his RSU income based on his work period there.

Common State Rules

• CA: Taxes RSUs earned while working there.

• NY: Taxes RSUs based on work during the vesting period.

• TX & FL: No state income tax.

• MA & IL: Use time-based sourcing.

Residency & Tax Credits

• Moving states before vesting can create multi-state tax obligations.

• Many states offer credits to avoid double taxation.

4. Employer Responsibilities

• Withhold state taxes based on work history.

• Report RSU income properly in W-2s.

• Ensure payroll tracks employee locations.

5. Employee Strategies

• Plan moves carefully to minimize taxes.

• Consider estimated tax payments.

• Work with a CPA to maximize tax credits.

6. Best Practices

• Employers should track RSU vesting locations.

• Educate employees on multi-state tax implications.

• Maintain records for audits and compliance.