Withholding policy for stock/RSU awards granted in one state and vested in other

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talky47
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Joined: Sat May 01, 2021 1:56 pm

Withholding policy for stock/RSU awards granted in one state and vested in other

Post by talky47 »

I work for a big tech company. I used to work in Oregon, but transferred to California a few years ago. So I'm a California tax resident, Oregon nonresident. I have stock (RSU) grants that were awarded in Oregon, but continue to vest in California.

I understand that a portion of the income from those grants will be taxable in both states, and my employer has indeed filed a W-2 that shows income in both states. After reviewing documents provided by my employer, I believe their policy is to:
  • Report the total amount of the stock award as California income.
  • Determine the Oregon portion of the total amount, and report that as Oregon income.
  • Withhold Oregon tax based on the Oregon portion, at the Oregon withholding rate.
  • Withhold California tax based on (total_amount - oregon_portion), at the California withholding rate.
But I understand that California and Oregon handle the other state tax credit as a "reverse credit". So I think I should do my California taxes first, and then take a credit in Oregon for the share of California tax attributable to the Oregon portion. That means I owe lots of money in California (since no California taxes were withheld on the Oregon portion), and I have a big refund in Oregon.

Is my understanding correct above? And if yes, is my employer's withholding policy typical (or even compliant)? It seems completely wrong for "reverse credit" state pairs like mine. Even with "forward credit" state pairs, it seems like this would result in under-withholding if the new state has a higher tax rate than the old state, since the new state will tax the full amount and the credit from the old state won't fully offset that.

I've sent my employer's payroll department email, and will update this topic when they respond. Curious to see if anyone already has experience though. I've searched but found nothing, I guess not a common situation. Thanks, and great forum.
Topic Author
talky47
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Joined: Sat May 01, 2021 1:56 pm

Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by talky47 »

Update: My employer just told me to "consult my tax advisor", not too helpful. I spoke with a friend who's a CPA, and she thought the policy was simply wrong, developed without consideration for reverse credit state pairs. So I plan to file with the understanding above, pay the penalties, and keep escalating with my employer so this doesn't happen again next year. Worst case, I could make quarterly payments to California myself, and live with the Oregon over-withholding. Any further advice appreciated though, since this seems ridiculous.
fabdog
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Location: Williamsburg VA

Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by fabdog »

I had a similar, but not exact issue to yours... I had RSU's and other grants as an employee in AZ. I retired and moved to VA. Some of these grants vested yearly after my retirement.

My employer reported these as AZ income, and withheld AZ tax. Since I was now a VA resident, VA also claimed that income. VA and AZ also have the "reverse" other state credit situation.

So, each year, I had to pay Va estimated taxes on the income from AZ to avoid penalties, and then file AZ non resident to get my money back (claiming the tax credit in AZ for the tax paid in Va on the same income)

I don't think your employer (which may be the same as my previous employer) is going to change their withholding to try and account for the state pairing issues. You can either pay estimates to avoid penalties in CA, or be short and pay penalties. That's one of the joys of multi state

Mike
Topic Author
talky47
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Joined: Sat May 01, 2021 1:56 pm

Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by talky47 »

fabdog wrote: Tue May 04, 2021 6:17 am I don't think your employer (which may be the same as my previous employer) is going to change their withholding to try and account for the state pairing issues. You can either pay estimates to avoid penalties in CA, or be short and pay penalties. That's one of the joys of multi state
Thanks, reassures me that I understand this correctly at least. Did you ever try pushing them to explain why they thought their withholding was compliant? I guess the nonresident state doesn't care; but I don't see the legal basis for withholding less in the resident state, beyond "we made a policy based on inapplicable law".
fabdog
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Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by fabdog »

I did not escalate or try and get them to change it. As you escalate within your employer, I believe you will find their answer will be "what we are doing is compliant"
understand that a portion of the income from those grants will be taxable in both states, and my employer has indeed filed a W-2 that shows income in both states. After reviewing documents provided by my employer, I believe their policy is to:

Report the total amount of the stock award as California income.
Determine the Oregon portion of the total amount, and report that as Oregon income.
Withhold Oregon tax based on the Oregon portion, at the Oregon withholding rate.
Withhold California tax based on (total_amount - oregon_portion), at the California withholding rate.
"We are withholding Oregon taxes on the Oregon income, and CA taxes on the CA income. The fact that employees depending on state pairs may not find that to be enough we can't possible program into the payroll software."

It's the same as the federal supplemental rate when your RSU's vest. They withhold at 22%. That may or may not be enough depending on your other circumstances, and you may have to have extra withholding on your regular paychecks, or pay federal estimates to avoid penalties

An irritating but unavoidable issue

Mike
Topic Author
talky47
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Joined: Sat May 01, 2021 1:56 pm

Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by talky47 »

fabdog wrote: Tue May 04, 2021 12:37 pm "We are withholding Oregon taxes on the Oregon income, and CA taxes on the CA income. The fact that employees depending on state pairs may not find that to be enough we can't possible program into the payroll software."
I guess they'd rely on something like the guidance at the top of page 16 (PDF page 23) of

https://edd.ca.gov/pdf_pub_ctr/de44.pdf

That says to "Make the withholding required by the other jurisdiction, and: For California, withhold the amount by which the California withholding
amount exceeds the withholding amount for the other jurisdiction, or Do not withhold any California PIT if the withholding amount for the other
jurisdiction is equal to, or greater than, the withholding amount for California."

But then they're still noncompliant since Oregon withholding is lower than California, though noncompliant by less.
fabdog
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Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by fabdog »

I think I grasp what you are pointing out... What you think should happen instead of
Withhold California tax based on (total_amount - oregon_portion), at the California withholding rate.
they should withhold on the total California amount, less any Oregon withholding done. That will likely be a different number, but still short on what you owe CA

and at the end of the day... what you are asking them to do is withhold more money for California... they can't do less for Oregon...

So whether you make estimated payments to CA or they withhold it for you... same $ impact, correct?

Mike
Topic Author
talky47
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Joined: Sat May 01, 2021 1:56 pm

Re: Withholding policy for stock/RSU awards granted in one state and vested in other

Post by talky47 »

fabdog wrote: Tue May 04, 2021 3:17 pm they should withhold on the total California amount, less any Oregon withholding done. That will likely be a different number, but still short on what you owe CA
Yeah, exactly. Not a big difference here since OR and CA have similar tax rates, but it could be for other state pairs. It wouldn't solve my problem, but it might solve someone else's.

As to Oregon, I think I'm exempt from withholding there, since it's true for me that:
  • Last year you had the right to a refund of all Oregon tax withheld because you had no tax liability, and
  • This year you expect a refund of all Oregon income tax withheld because you expect to have no tax liability.
https://www.oregon.gov/dor/forms/FormsP ... 1_2021.pdf

So it seems like I just need to give my employer a Form OR-W-4 that says I'm exempt, and they'll stop withholding in Oregon? Interesting question what they'd do about California then, whether they'd still consider the income "subject to personal income tax withholding laws of both California and another state" and thus subject to the different withholding treatment.

And yeah, same economic effect regardless of who makes the payments. Life would be easier if the withholding matched the actual liability, but perhaps that's not feasible here.
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