How to Manage RSA Vesting Tax Withholding and Reporting as an Employer

This is super helpful, but I'm still confused about the mechanics of option 1 - if the employee pays us directly, how do we record that properly for payroll? Do we still need to run it through our payroll system somehow or is there a separate filing for this?

If the employee pays you directly, you still need to record it through your payroll system to ensure proper tax reporting. Essentially, you'd record the RSA value as taxable income in your payroll system, calculate all applicable taxes (federal, state, FICA, etc.), but instead of withholding from their regular wages, you'd record that you received payment from them separately. The key is that your payroll records must show the full income and the proper withholding, regardless of how the money physically changed hands. Most payroll systems have a way to handle this through manual adjustments or specialized earnings codes.

Does taxr.ai only handle RSAs or do they also help with other equity compensation like ISOs and NSOs? Our company has a mix of different equity instruments and it's becoming a real headache to manage all the different tax treatments.

I'm skeptical about these online services. How do they actually verify the information is compliant with current tax law? The last thing I need is to follow advice that gets flagged in an audit.

They actually handle all types of equity compensation - RSAs, RSUs, ISOs, NSOs, and even some of the more complex structures like phantom stock. I was initially just looking for help with RSAs but ended up getting their guidance on our entire equity compensation strategy. Their compliance framework is pretty robust. All their guidance is reviewed by licensed tax professionals, and they keep everything updated with the latest IRS regulations. They actually pointed out several changes from the Tax Cuts and Jobs Act that our previous accountant had missed. I was impressed that they clearly cited relevant tax code sections and IRS guidance for every recommendation.

Wait, how does this even work? The IRS phone system is completely broken - are you saying this service somehow gets you to the front of the queue? That sounds too good to be true.

Sorry, but I don't buy it. If this service actually worked, everyone would be using it. The IRS is fundamentally understaffed and there's no magic way to get through. Plus, I doubt any random agent would know the specific rules around RSA withholding - that's a specialized area.

It works by continuously redialing and navigating the IRS phone tree for you. When they finally get through to an agent, you get a call back to connect you. It's not cutting the line - it's just automating the pain of constant redials and menu navigation. All IRS agents won't have specialized knowledge, that's true. When I got connected, I specifically asked for someone in the business tax department who was familiar with equity compensation. The first person transferred me to someone with the right expertise. It did take an additional 15 minutes of transfers, but I eventually got to someone who knew exactly how to handle RSA reporting and withholding requirements.

This is actually a common scenario with some tricky implications. When an employee makes an 83(b) election and then forfeits unvested shares upon departure, they've essentially paid taxes on income they never fully received. The employee can claim a capital loss (not an ordinary income deduction) when they forfeit the shares. However, this loss is limited to the amount they actually paid for the shares, not including any taxes they paid on the phantom income through the 83(b) election. From the employer reporting perspective, you don't need to issue any corrected tax forms. The original income reporting was correct at the time of the 83(b) election. The employee's capital loss is handled on their personal tax return in the year of forfeiture.

Thanks for the clarification! That makes sense but feels a bit unfair to the employee. Sounds like they're basically stuck with having paid taxes on income they ultimately never received, since a capital loss deduction is typically less valuable than an ordinary income deduction. Is there any way to structure our RSA program to mitigate this risk for employees, or is this just an inherent downside of making the 83(b) election?

Unlike ISOs (which require Form 3921) or ESPPs (which require Form 3922), there's no special information return required for RSA grants. The income is simply reported on Form W-2 when the tax event occurs (either at grant with an 83(b) election or at vesting without one). However, if the RSAs are being granted to non-employees like consultants or board members, you would report the income on Form 1099-NEC rather than a W-2.

Thanks! That's actually simpler than I expected. So just to be crystal clear - for a standard employee RSA grant with no 83(b) election, we just add the value of the vested shares to their W-2 as they vest, and there's no additional filing required?