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property. At the point of vesting, the fair market value (FMV) of the RSUs is treated as ordinary income, subject to federal and state income taxes, as well as FICA taxes. Unique Challenges with Pre-Retirement Vesting When RSUs vest before an employee retires, several taxation issues arise, particularly around the collection of FICA taxes: Timing of FICA tax liability: FICA taxes are due at the time of vesting and not when the RSUs are ultimately sold. This can create cash flow challenges for employees who may not be liquidating
the shares immediately to cover the tax liability. The employer is required to withhold FICA taxes from the employee’s paycheck or other compensation at the time of vesting, which can be particularly complex for employees nearing retirement with irregular income. Cap on Social Security Tax: Social Security tax under FICA has an annual wage base limit, which is adjusted annually. If the RSUs vest in a year when the employee’s other earnings already exceed the wage base limit, only the Medicare portion of FICA taxes will apply. However, if the RSUs vest early in the year or the employee’s salary alone does not exceed the limit, the Social Security tax will apply, increasing the immediate tax burden. Administrative Burden for Employers: Employers must ensure accurate withholding and reporting of FICA taxes when RSUs vest. This process can become complicated for employees approaching retirement who may have complex compensation arrangements, including reduced regular pay or other deferred compensation.
For employees nearing retirement, there is a risk of perceived double taxation if they do not fully understand the distinction between the taxation at vesting and the capital gains taxation when the shares are eventually sold.
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GLOBAL PAYROLL MAGAZINE ISSUE 9
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