Amazon RSUs: Avoid Overpaying Taxes

Understanding Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are a form of equity compensation that Amazon grants to employees as part of their total compensation package. RSUs are essentially company shares awarded to employees, but they do not become fully owned until they vest. Once RSUs vest, they are considered taxable income at their fair market value on the vesting date and are included in the employee’s W-2 income.

At Amazon, RSUs typically vest in a four-year schedule with incremental vesting periods. When RSUs vest, Amazon automatically withholds a portion of the shares to cover estimated federal and state taxes, known as “sell to cover.” However, this withholding is often insufficient to cover an employee’s actual tax liability, potentially resulting in an unexpected tax bill.

How Amazon RSUs Are Reported and Taxed

When RSUs vest, Amazon reports their fair market value as taxable wages on your W-2. The amount is subject to federal and state income taxes, Social Security, and Medicare. Amazon withholds taxes by selling a portion of your RSUs, but this may not cover your full tax liability, particularly if you are in a higher tax bracket or live in a high-tax state.

In addition to W-2 reporting, Amazon RSU sales appear on a Form 1099-B issued by a brokerage firm, such as Morgan Stanley. This is where many employees make critical tax filing errors.

Common Tax Mistakes With Amazon RSUs

1. Failing to Report the 1099-B
   • Many Amazon employees are unaware that they must report their 1099-B stock sales, even if they did not personally sell any shares. When Amazon withholds shares for a sell-to-cover transaction, it is treated the same as if the employee personally sold the shares, and a 1099-B will be issued.
     
     
   • The IRS cross-references W-2 and 1099-B forms, and failing to report the stock sale can trigger a CP2000 notice.
     
     
2. Not Adjusting the Cost Basis
   • The cost basis on your 1099-B often shows a lower amount than the actual value of the RSUs included in your W-2.
     
     
   • If you do not adjust the basis to reflect the amount already taxed on your W-2, you could overpay taxes on the RSU sale.
     
     
   • For Amazon RSUs, your cost basis should equal the fair market value of the shares at vesting, not the default value listed on your brokerage statement.
     
     
3. Incorrectly Responding to an IRS CP2000 Notice
   • If you forget to report your 1099-B, the IRS will send a CP2000 notice assessing additional taxes.
     
     
   • The IRS may assume the entire sale is taxable because often they do not see the cost basis unless you report it.
     
     
   • Never pay the CP2000 notice without first correcting the cost basis and responding with proper documentation.
     

How to Correctly Report Amazon RSUs on Your Tax Return

1. Verify Your W-2 Income
   • Ensure that the total fair market value of vested RSUs is included in Box 1 of your W-2.
     
     
2. Report the 1099-B Stock Sale
   • Enter the RSU sale transaction from your brokerage 1099-B on Schedule D and Form 8949 of your tax return.
   • Adjust the cost basis to reflect the fair market value at vesting, as this amount has already been taxed.
     
     
3. Account for Additional Tax Liabilities
   • Amazon’s standard withholding for RSUs is often 22% (or 37% for those earning over $1 million per year), but your actual tax rate could be higher.
   • Consider making estimated tax payments or increasing your W-2 withholdings to avoid an unexpected tax bill.
     

Final Thoughts

Amazon RSUs are a valuable part of your compensation, but failing to properly report them can lead to costly tax errors. Always check your W-2 and 1099-B, adjust your cost basis, and ensure proper reporting to avoid overpaying taxes or receiving an IRS notice. If you are unsure about handling your RSUs or you receive a IRS CP2000 notice, reach out to Taxman Associates to ensure you are maximizing your income while staying compliant.

By understanding how RSUs work and how they are taxed, you can avoid overpaying taxes and keep more of your hard-earned compensation.