Avoid Surprise Tax Bills from Bonuses and RSUs
Bonuses and Restricted Stock Units (RSUs) are common forms of compensation for employees in the US. In this guide, we'll explore how regular bonuses and RSUs are taxed in the US.
Why it matters: Australians in the US receiving bonuses or RSUs may be surprised by year-end tax bills because the way they are withheld for in the US differs significantly from Australia. Planning ahead can help manage tax liabilities effectively.
Bonuses
As an employee, you can earn a bonus as additional supplemental income. Bonuses are often based on work performance metrics.
How they’re taxed in the US:
Withholding: Bonuses are typically subject to a flat tax rate for federal withholding, which may differ from your regular income tax rate. There are also additional flat tax rates applied based on the state in which you reside.
Social Security and Medicare Taxes: Similar to regular wages, bonuses are subject to Social Security and Medicare taxes (FICA taxes).
Restricted Stock Units (RSUs)
RSUs are stock awards granted as part of employee compensation.
How they’re taxed in the US:
Vesting: RSUs usually have a vesting period during which they become eligible for distribution. When RSUs vest, their fair market value (FMV) at the time of vesting is considered taxable income, similar to cash bonuses. The value of the vested RSUs is reported on your W-2 form.
Withholding: When it comes to taxes on vested RSUs, employers often sell a part of them to cover the income tax. This involves a fixed amount being withheld for taxes at both the federal and state levels, similar to what happens with regular bonuses.
Taxes on Bonuses and RSUs in the US
Unlike Australia, in the US, taxes aren't automatically deducted from your paycheck based on your earnings. Some Australians in the US may not know this, leading to insufficient tax withholding. In the US, bonuses and RSUs are taxed at fixed rates, irrespective of your regular salary. This can result in a higher overall tax rate because employers don't consider the impact of extra earnings on your regular salary tax rate. Many Australian expats in the US receiving bonuses or RSUs are surprised by year-end tax bills.
Avoid Surprise Tax Bills with these Strategies
To manage the impact of bonuses and RSUs on your overall tax liability you can:
Adjust W-4 Withholding Allowances: Review your W-4 form with your employer and adjust your withholding allowances to account for additional income from bonuses and RSUs.
Pay Quarterly Taxes: Estimate your total tax liability for the year, considering all income sources and deductions and remit quarterly estimated taxes based on how much you will owe. This can help you avoid a large bill at tax time and manage your cash flow.
Contribute to Retirement Accounts: Contributing to retirement accounts, such as a 401(k) or IRA, can reduce your taxable income, potentially lowering your overall tax liability.
Elect a higher sell-to-cover on RSUs: If your employer allows it, you can elect a higher sell-to-cover percentage to cover the possible tax liability, however it means receiving less of the company stock.
Seek Professional Assistance: Given the complexities of international tax matters, seeking guidance from an international tax professional is essential. They can help you understand your tax situation and plan effectively.
Concluding Thoughts
As an Australian expat in the US, understanding how bonuses and RSUs are treated is vital for managing your overall tax liabilities effectively. By being aware of the differences in withholding methods and implementing tax planning strategies, you can navigate the US tax system with confidence and avoid unexpected tax bills at year-end.