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How do I calculate Tax Withholdings for RTUs?
How do I calculate Tax Withholdings for RTUs?

Estimating Tax Withholdings for RTUs

Written by Austin Mills
Updated over a week ago

Disclaimer: Withholding taxes accurately is the legal responsibility of the issuing company, not Pulley. Pulley provides tool to help you estimate token withholdings, but you should consult your tax and legal advisors if you have questions regarding your tax withholding.

Covered in this guide

    1. Why should I withhold taxes on tokens?

    2. When do I need to withhold taxes?

    3. How do I need to withhold taxes?

    1. Federal/FICA/State

    2. Fallback rates

    1. Updating stakeholder information

    2. Syncing payroll providers

    3. Customizing rates/prices

    1. Transactions on Pulley

    2. Transactions off of Pulley

Withholdings Overview

Why do I need to withhold taxes on RTUs?

Restricted Token Units are the legal token equivalent of Restricted Stock Units (RSUs). In the US, RTUs are considered a form of employee compensation. Like with other forms of compensation (salary, bonus, etc.) the employer is legally responsible for withholding taxes on the payment, at the time of payment.

Withholding rules may vary for other countries and jurisdictions.

When do I need to withhold taxes?

It depends on when the tokens are transferred to employees. Generally, if a token is live (launched), taxes should be withheld at the time of transfer. This may be at the time of vest or settlement, depending on how your RTUs are set up.

How do I withhold taxes?

RSUs and RTUs typically apply one of two strategies:

  1. Net settlement. The employer withholds a certain number of tokens from the original payment equivalent to the withholding tax.

  2. Cash settlement. The employer transfers the full amount of tokens owed to an employee. It is then the employee’s responsibility to pay the employer back the tax liability (in ‘cash’).

Either option is valid and is sometimes specified by the language in the RTU agreement. Employers then remit the taxes (in cash, not tokens) to appropriate authorities according to their legal schedule requirements (often quarterly).

Calculating Withholdings for Tokens

RTUs in the US are considered supplemental income. This means that employers should withhold taxes (for Federal and State) according to supplemental income withholding rules. The basis for withholding is the total value transferred at the time, which is defined as:

Token income = (# of tokens) * (price per token)

The price per token is usually taken near the time of token transfer, but can vary depending on your tax strategy (e.g. using a 30-day average, the daily high, low, etc.). On Pulley, you can customize the token prices to suit your needs.

Federal Income Rates

The IRS has published guidance for employer withholding on supplemental income. For federal income, there are two options available to employers:

  1. Combined Wages. If you pay tokens at the same time as normal wages (same payroll cycle), you can combine the two as ordinary income in a single payment. You then pay relevant federal taxes based on this new effective wage base. Note, you may also use this method if you pay tokens separately, but you’ll have to calculate the difference in what should have been paid and then withhold this difference.

  2. Flat Rate. You may withhold all supplemental wages paid apart from normal wages at a flat rate of 22%. This includes token payments.

Note: any supplemental wages paid in excess of $1 million to an employee for the year must be withheld at a higher marginal rate of 37%, regardless of which option you use.

Pulley uses the flat rate to estimate federal income taxes. This is because the majority of token payments are done separately from payroll cycles, and most payroll providers do not currently offer token support.

This may result in discrepancies for your employees when they file end of year tax returns. This is due to the fact that employers withhold at a supplemental tax rate, while employees will be taxed as if tokens are part of ordinary income EOY. Their ordinary income rate may be higher or lower than the flat 22% rate. You can customize rates by employee if they want to opt-into higher or lower withholding rates.

FICA Rates

All token payments are required to withhold taxes to cover FICA (social security and Medicare). This is separate from federal income withholding. For FICA, there is no distinction between ordinary and supplemental income, so the rates are solely dependent on gross year-to-date income. The includes normal salary, tokens, bonuses, and other forms of income.

We estimate FICA rates based on the gross year-to-date income information you provide for stakeholders. Our estimate will only be as accurate as the information inputted. Alternatively, you may choose to sync with your payroll provider through our HRIS sync (see below for more). This will automatically pull in YTD income information when possible.

FICA rates are then estimated as follows according to IRS guidance:

  • Social Security

    • If YTD annual income ≤$147,000, the withholding rate will be 6.2%

    • If YTD annual income exceeds this, the withholding rate will be 0%

  • Medicare

    • If YTD annual income ≤$200,000, the withholding rate will be 1.45%

    • If YTD annual income exceed this, the withholding rate will be 2.35%

State Rates

Tax withholdings vary state-by-state. There are generally three approaches taken by states (with some nuance in local county/city rates, etc.):

  1. No state income tax (no withholding)

    1. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

    2. Pulley will estimate 0% withholding for these states

  2. Flat rate withholding for supplemental income

    1. Alabama, Arkansas, California, Colorado, Georgia*, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont**, Virginia, Wisconsin***

    2. Pulley will estimate the listed flat rate for 2022 in these states (varies by state)

  3. Progressive marginal tax rate

    1. Arizona, Connecticut, Delaware, District of Columbia, Hawaii, Louisiana, Maryland, Mississippi, New Jersey, South Carolina, West Virginia

    2. Pulley will default to the highest tax bracket in these progressive marginal states

    3. Note, this may not be perfectly accurate for every stakeholder, and could overwithhold. Pulley is unable to offer more exact estimates without information like W-4 opt-ins, deductions, and more. You can still customize the state rates for employees if you wish to change these rates

Notes: Georgia’s flat rate is technically progressive, but is not marginal. Calculated by estimated annual income. Vermont is calculated as a (%) of federal withholding amount. Wisconsin follows the same pattern as Georgia.

Fallback Rates

All of the above listed rates are assumed to have the prerequisite stakeholder information in Pulley in order to make an informed withholding estimate. For each stakeholder, this info is:

  • Federal Rate: YTD gross supplemental income. This includes things like bonuses, overtime, commission, etc. We’ll determine the YTD token income paid so far.

  • FICA Rate: YTD gross total income. This is the sum of YTD salary, YTD gross supplemental income and YTD token income

  • State Rate: Varies by state. Generally, this is determined by estimated gross annual income (not YTD).

If a required field for one of the estimates is not completed, we will instead use a fallback rate. This is generally the most common withholding rate for each type of tax, or the one least likely to cause significant overwithholding or underwithholding.

2022 Fallback rates:

  • Federal Rate: 22%

  • FICA: 7.65%

  • State: Varies, but generally defaults to the highest withholding bracket outlined in state guidance

Estimating Withholdings on Pulley

Updating Stakeholder Information

Up to date stakeholder information is needed to make high fidelity tax withholding estimates. This means every time that you plan to settle tokens you should verify the relevant stakeholder information.

The manual way to do this is by pressing the Edit Stakeholder Information button. This will take you to a spreadsheet where you can easily see all stakeholders currently issued tokens on the platform. You can then edit things like location, income, and tax filing status.

Syncing Payroll Providers

Alternatively, you can use our payroll sync to automatically pull in employee personal information. All you have to do is navigate to company settings and scroll down to ‘Connect with HR Services.’ The setup will walk you through permissions and explain what data Pulley will have access to.

Once stakeholders on Pulley are connected through the integration to an HRIS, we’ll be able to incorporate things such as location, year-to-date income, and more.

Customizing rates/prices

You may wish to use custom token prices for vesting to help with reporting needs. For instance, if you use token prices from an exchange that we don’t support, or have more nuanced price averaging, you can incorporate this here.

In the withholding tab, you’ll see a section for custom token pricing. Here, for any vest/settlement date you can record a custom price. We’ll then use this price as the basis for all token reporting for that relevant date.

Using Withholdings

Transactions on Pulley

You can easily apply withholding rates to existing and new token transactions on Pulley. By pressing ‘Start a Transaction’ you will be navigated to the token transaction portal. This will show all pending token transactions that are due to be sent to stakeholders.

By switching on the ‘Apply Withholdings’ toggle, you will activate a net settlement for any pending transactions. This uses the withholding rates calculated and verified previously and applies them to the pending transactions. You will then see the new token transfer amount reflect the net difference between tokens vested and tokens withheld.

Two notes about transactions on Pulley:

  1. We currently do not support cash settlements on platform. If you wish to use this method, you should perform transactions as usual, without withholdings toggled ‘on.’ Then, use the token withholding report to get an accurate ledger of taxes owed by each stakeholder to complete offline.

  2. Tax withholding estimates will lose fidelity for older transactions. Since many of the withholding estimates rely on year-to-date (YTD) income information, applying newly calculated withholding rates to older transactions will be more likely to be inaccurate.

Transactions off of Pulley

If Pulley does not currently support your wallet type, token standard, or blockchain, you may wish to download and use transaction/withholding information off platform.

You can do this by selecting the ‘Download Report, Transact Later’ button. This will provide an excel export of all token vest events, by stakeholder and agreement, with corresponding detailed information. This includes, if available, token amount, token price at vest, tax withholding rate, tax withholding amount, and net token transfer amount. You should be able to easily use this report to facilitate any settlement dates or other token payouts to a wide range of stakeholders.

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