Amazon RSU Taxes: What Changes in Year 3 and 4
Everyone loves RSUs until tax season kicks in.
That can be especially true for Amazon employees. The first couple of years of an Amazon compensation package can feel pretty manageable. Then year three arrives, the vesting schedule changes, the sign-on bonus may be gone, and suddenly a much larger amount of stock is showing up as taxable income.
If you're not prepared for that change, your tax bill can catch you by surprise.
The good news is that the issue isn't as complicated as it may seem. Once you understand how Amazon RSUs are taxed, how withholding works, and what changes in years three and four, you can start planning before the next big vest hits.
Watch the Video: Amazon RSU Taxes and the Year 3 Surprise
If you'd rather watch than read, here's the full video:
Why Can Amazon RSU Taxes Change So Much in Year 3?
Here's an easy way to think about it.
Imagine you sign up for a new service and get a low introductory rate. Everything looks great at first. Then your first renewal comes around and the price jumps.
Nothing necessarily went wrong.
You simply reached the point where the introductory rate was no longer part of the deal.
Amazon RSUs can create a similar experience.
Amazon has commonly used a 5% / 15% / 40% / 40% vesting schedule for certain RSU grants. Under that schedule, a relatively small portion of the original grant vests during years one and two, followed by much larger portions in years three and four.
Your individual grant terms can vary, so it's important to check your own grant documents.
But the basic idea is the same:
The first couple of years can look very different from years three and four.
And if you've received additional RSU grants along the way, those grants can have their own vesting schedules running at the same time.
That's when things can get interesting.
Years 1 and 2 Can Make Everything Look Fine
During your first two years, the amount of stock vesting from your original grant may be relatively small.
Your sign-on compensation may also help fill in some of the gap.
So your paycheck arrives. Some RSUs vest. Taxes are withheld. Tax season comes and goes.
Maybe you owe a little.
Maybe you get a refund.
Either way, it can feel like the system is working just fine.
Then year three arrives.
Your sign-on compensation may be finished, while a much larger portion of your original RSU grant begins vesting.
And those shares are now being added to everything else you're earning.
Your salary.
Your bonus.
Your spouse's income.
Additional RSU grants.
Other taxable income.
That's when your tax picture can change quickly.
When Are Amazon RSUs Taxable?
This is one of the most important things to understand about RSUs.
RSUs are generally taxed as ordinary income when they vest.
You don't have to sell the shares for the income to count.
For example, let's say 1,000 shares vest when the stock is worth $100 per share.
That's $100,000 of compensation that is generally included in your taxable wages, subject to your specific plan and tax situation.
You can sell the shares immediately.
You can hold them.
You can use the money for something else.
But the vest itself is generally the taxable event.
That means you can have a significant tax obligation before you've made any decision about what to do with the stock.
Why 22% Withholding May Not Be Enough
Here's where many high-income Amazon employees get caught off guard.
Federal tax withholding on supplemental wages can be different from your actual tax liability.
For certain supplemental wages, employers may use a flat 22% federal withholding rate when the applicable rules are met.
But 22% withholding does not mean you only owe 22% tax on that income.
Your actual tax bill depends on your complete tax picture.
That includes things such as:
Your total household income
Your tax filing status
Your marginal tax brackets
Deductions
Tax credits
Other income
State taxes
Other withholding and estimated tax payments
Here's a simple example
Let's say you have $100,000 of RSUs vest during the year.
If 22% is withheld for federal income tax, that's $22,000 withheld.
But if some of that income ultimately falls into a higher federal tax bracket, your final tax liability can be higher than the amount withheld.
That's where a potential withholding gap comes from.
And if you live in a state with an income tax, that needs to be considered, too.
The important point is this:
The amount withheld when your RSUs vest is not necessarily the same as the amount you'll ultimately owe.
For a deeper look at this issue, read our guide on how to avoid underpayment penalties when you have RSUs, bonuses, and stock compensation.
Why Year 3 Can Be a Bigger Tax Problem
Now put all of this together.
Your original RSU grant may have a back-loaded vesting schedule.
Your sign-on compensation may be finished.
Your salary may have increased.
You may have received additional RSU grants.
And those newer grants can have their own vesting schedules.
So by year three, you may not be dealing with one vesting schedule.
You could have several grants vesting at the same time.
Each one adds another piece to your taxable income.
That's why looking at your next vest in isolation isn't enough.
You need to look at the entire year.
Your Household Income Matters
Another common mistake is looking at your RSUs separately from the rest of your finances.
Your tax return doesn't do that.
Your salary matters.
Your bonus matters.
Your spouse's income may matter.
Your RSUs matter.
Other income, deductions, and credits may matter.
All of those pieces come together to determine your overall tax situation.
That's why a $100,000 RSU vest can have a very different tax impact from one household to another.
The better question isn't:
"How much tax will I owe on my RSUs?"
It's:
"What will my total household tax picture look like after these RSUs vest?"
What Can You Do Before Your Next Amazon RSU Vest?
The goal isn't to guess your tax bill.
The goal is to look at the numbers before the vest happens.
1. Check Your RSU Tax Withholding
Start with your equity compensation portal.
Look at how taxes are handled when your RSUs vest.
Many employees use a sell-to-cover arrangement, where some shares are automatically sold to cover taxes.
That's convenient.
But don't stop there.
Find out how much is actually being withheld and compare that with your projected tax situation.
You want to know whether there may be a gap before the shares vest, rather than discovering it months later.
2. Consider Additional Payroll Withholding
Your regular paycheck can also be part of the solution.
Depending on your situation, you may be able to increase federal tax withholding from your paycheck.
For some taxpayers, additional withholding can be a practical way to increase tax payments during the year instead of waiting until tax filing season.
Because tax rules and individual situations vary, talk with your tax professional before making changes to your withholding.
3. Look at the Full Year
Don't just ask how much stock is about to vest.
Look at your estimated income for the entire year.
That may include:
Base salary
RSU vests
Bonuses
New RSU grants
Your spouse's income
Other taxable income
Deductions and credits
Federal withholding
State withholding
Estimated tax payments
This gives you a much clearer picture of where you may stand.
4. Start Before the Vest
April is usually not the ideal time to discover that your withholding was too low.
By then, the income has already been earned and the year is over.
If you know a large RSU vest is coming, start looking at the numbers beforehand.
For example, if a significant vest is scheduled in a few weeks, that can be a good time to review your projected income and withholding with your financial and tax professionals.
The earlier you identify a potential gap, the more options you may have during the year.
What Should You Do With Amazon RSUs After They Vest?
Once you understand the tax side, there's another question waiting for you:
Should you sell your Amazon RSUs or hold them?
That's a separate decision.
The fact that your RSUs vested doesn't automatically tell you what you should do with the shares.
You need to consider your overall investment portfolio, your goals, your time horizon, your risk tolerance, your tax situation, and how much of your financial life is already connected to Amazon.
For a deeper look at that decision, read:
Should You Sell RSUs When They Vest or Hold Them? What High Earners Need to Know
Don't Let Your RSU Vesting Date Be the First Time You Look at Your Taxes
Amazon RSUs can be a significant part of your compensation.
But they can also make your tax situation more complicated.
Years three and four can be particularly important because larger portions of certain RSU grants may begin vesting while newer grants may be running alongside them.
And because RSUs are generally taxed when they vest, the amount withheld at that time may not match your eventual tax liability.
The place to start is simple:
Know what is vesting. Know what is being withheld. And look at your entire household income before the shares arrive.
If you're an Amazon employee and want a starting point for understanding your potential RSU withholding gap, check out our RSU Tax Calculator.
You can enter your estimated vest amount, income, state, and filing status to get a rough estimate of your potential withholding gap.
For personalized tax advice, work with your tax professional and financial advisor to review your specific situation.
More Resources for Amazon Employees With RSUs
RSU Tax Planning: How to Avoid Underpayment Penalties for High-Income Earners
Learn more about managing tax payments when RSUs, bonuses, and other stock compensation increase your taxable income.
Should You Sell RSUs When They Vest or Hold Them?
Explore the key questions to consider when deciding what to do with your shares after they vest.
Tax rules and RSU plans can change, and individual circumstances vary. This article is for educational purposes only and is not tax, legal, or investment advice. Consult your qualified tax and financial professionals regarding your specific situation.
