How Much Should you Withhold on your Stripe equity?

Red alert! As we discussed in this week's podcast episode, Stripe is in hot water and must go public by the end of this year, or at least find some way to get liquidity to the hundreds, or is it thousands of employees who have expiring RSUs. (Click here if you want to read more about RSUs and how they work) 

Stripe has given current and former employees the option to withhold taxes at different rates, either 22% or 37%. As a tax professional and financial advisor, I think this is AWESOME! I'm so glad Stripe is taking a page from Meta's book and allowing employees to choose how much tax they want to be withheld on vesting RSUs. The downside is that employees have to make a choice and most employees are not tax experts so my inbox is full of emails from clients going, "what the heck do I do here?" 

TLDR: It's more conservative and generally a good idea to select 37% withholding on RSUs because that is the top tax bracket. If you pick 37%, you will likely avoid owing more tax and may even get a refund. On the other hand, if cash flow is tight or your income level puts you far away from the top tax bracket, then selecting 22% is a good option, so you receive more cash now when your shares are sold.

So what's at stake here? 

Double Trigger Vesting 

Presumably, Stripe is going to experience a liquidity event, either through a secondary sale or tender offer OR through an IPO. That event is known as the second trigger for the vesting of RSUs. Many current employees and former employees have satisfied the FIRST vesting trigger just by working at Stripe, but according to the stock grants, the SECOND vesting trigger must be met for the employees to actually receive the shares. That SECOND vesting trigger is a liquidity event. 

Withholding 

So WHEN that second vesting trigger is met, the RSUs will vest and the employees will receive the shares. Now RSUs are units of stock paid as compensation for service, in other words: the value of that stock on the day of that second trigger is counted as taxable income to the employee. Just like a regular paycheck, employers are required by the IRS to withhold federal and state income taxes on any compensation. Quick refresher: withholding means dollars are automatically held back and paid to the state or federal government as a tax payment. By default, most employers will withhold at 22% for any income that isn't salary, which is known as the supplemental wage rate. This applies to vesting equity, bonuses, and other types of non-salary compensation. This supplemental wage rate is DIFFERENT from your regular paycheck withholding rate, which YOU have control over via a form called the W4 that you fill out when you are first hired. Fun fact: you can update your W4, and, therefore your paycheck withholding at any time! So essentially, Stripe is allowing employees to withhold MORE than the supplemental wage rate to help high earners avoid a surprise tax bill.

Reminder: how much you WITHHOLD has NO impact on the actual tax you owe. It just depends if you want to pay more of the tax now, or just pay it later when it's due on April 15th. Here’s a bit more on Brooklyn Fi’s philosophy around tax withholding. 

Now let's make a case for both withholding rates. 

By the way, Brooklyn Fi strongly prefers the 37% rate. We like to protect our clients from an unexpected nasty tax bill. And hey, who doesn’t love a refund? 

Why you should pick the 22% tax withholding rate 

  • Your total household income for the year PLUS the entire value of your vesting RSUs puts you in the 22% tax bracket or lower. Roughly: if your income is less than $100,000 or $190,000 as a married couple in 2023. 

  • You really need the cash now, perhaps for a home purchase or other immediate need. You’ll worry about any taxes or potential penalties later. 

Why you should pick the 37% tax withholding rate  

  • Your total household income for the year PLUS your vesting RSUs puts you in the 22% tax bracket or higher. 

  • You want to avoid a surprise tax bill. 

  • You want to avoid any potential underpayment penalties. If you don’t pay enough tax at the right time, you could get hit with an additional tax penalty. 

  • You generally prefer avoiding risks and doing something that might hurt a little in the short term but will avoid lots of pain the in the long run. 

AJ Grossan