Withholding Election on Chime RSUs at IPO

Written By EquityFTW

Chime’s IPO is just around the corner, and if you’re reading this, you’re probably wondering what withholding election you should make on your Chime RSUs. 

It’s an important decision, and the reality is that we won’t know what decision will have been best until after Chime’s IPO lock-up. 

So if you currently work at Chime, or are sitting on Chime RSUs from a past stint there, this article will provide you with the information you need to decide what tax withholding election you should make.

Chime RSU Standard Withholding Rates

When Chime IPOs, your RSUs will become taxable at the IPO price. 

The number of RSUs you have multiplied by the IPO price will be treated as taxable income, and Chime will be required to withhold at the following rates:

  • 22% until $1M of RSU income

  • 37% after $1M of RSU income

It’s not Chime that sets these rates, it’s the IRS. The 22% and the 37% are known as Statutory Withholding Rates.

The Problem With Statutory Withholding Rates on Chime RSUs

The big problem with the way statutory withholding rates work is that if you make $150k+ from salary, bonuses, and RSUs (that’s most of you), then you’re probably not having enough withheld from your RSUs and will owe a good chunk of taxes come tax time.

People end up owing underpayment penalties all the time simply because they don’t realize there’s a shortfall on the withholding.

Now the interesting thing with Chime’s IPO is that RSU holders will have withholdings taken from their RSUs at IPO, but then due to the lock-up, probably won’t be able to sell any shares for another 180 days.

This means that if you are underwithheld at IPO and the value of Chime drops over the 180 days, the shortfall might force you to later sell Chime shares after the lock-up. And who knows what the price will be then. (Hopefully higher, but who knows.)

The Withholding Election Decision

Chime RSU holders received a notice that if they want, they can choose to withhold at 37% instead of the standard 22% up until $1M of RSU income.

Pros of Selecting 37%

The big pros of selecting 37% instead of leaving at 22% are the following:

  1. You won’t have to worry about tax underpayment issues caused by your Chime RSUs since 37% is the highest tax bracket.

  2. Withholding at 37% is like giving you the ability to sell 15% more shares immediately at IPO.

  3. If the over-withholding generates a refund, you’ll be able to use that cash however is best for you.

Cons of Selecting 37%

  1. By effectively selling more Chime RSUs at IPO, it means that you have less Chime stock. If Chime goes to the moon as they say, then you’ll potentially miss out on some meaningful gains.

  2. Withholding at 37% probably means you’re setting aside too much for taxes, and giving your money early to the government isn’t really optimal.

Questions to Ask Before Deciding on Withholding Election on Chime RSUs

Depending on just how big this event is for you, it can mean a lot of different things. If you have NSOs or ISOs to go along with your RSUs, it can also mean a lot more complexity.

That said, here are some questions we like to figure out with clients to help them decide whether or not to withhold at 22% or 37%. (In no particular order.)

  • If I withhold at 22% on my RSUs, what is my estimated tax shortfall? (Won’t be able to calculate until IPO price is known.)

  • If withholding at 22% means I’m underwithheld, what’s my plan to make up for my tax shortfall?

  • If there is a tax shortfall, and I need to sell additional shares of Chime, can I accept selling post lock-up? Regardless of the price point?

  • If I withhold at 37%, will I be able to live with myself if Chime goes up significantly and I miss out on the gains?

  • After IPO lock-up, what am I going to do with the Chime equity that I still have?

We could think of countless more questions, and with our clients, we typically create with custom sales strategies, diversification plans, and run the rough tax projections for them so there’s no guesswork.

Chime RSU Resources to Help You Through IPO

These resources aren’t specific to your Chime RSUs, but we’ve helped thousands of RSU recipients improve how they manage their RSUs. Here’s a list of some tools and articles to help you make sure you’re ready to roll at this IPO.

Final Thoughts on Chime Withholding Election

If you’re a conservative person, the more conservative choice is to elect the 37% on your Chime RSUs.

If you’re more of a risk taker and really believe Chime is headed upward, then sticking with the baseline 22% makes sense.

The right choice is different for everyone, and the reality is we can’t know what Chime is going to do in the future, so who knows what will turn out to have been the best decision. If you have a solid rationale for the decision, then move forward and don’t dwell on the past. In the future, you’re welcome to glance back to see if it was the right call, but don’t get stuck in the past. It’s not healthy.
Thanks for reading! If you need any help during the IPO, you’re welcome to reach out to us at team@equityftw.com and check out our about page.

EquityFTW
Next

Avoid Tax Underpayment Penalties in CA