Sell-to-Cover

What it means

When you receive shares of company stock, the government considers those shares to be income. Because of this, your employer is required to take out money for taxes before you get your shares.

Sell-to-cover is a simple way to pay these taxes. Instead of you paying cash from your bank account, your company automatically sells a small portion of your new shares. The money from that sale goes directly to the government to cover your taxes, and you keep the rest of the shares.

A simple example

Imagine you earn 100 shares of stock. The total value is $1,000. Your employer needs to take out $300 to pay your taxes. To do this, the company sells 30 of your shares for $300. You are left with 70 shares in your account. You do not need to do anything or pay any extra cash.

Why it matters to you

• It saves you from having to pay a large tax bill out of your own pocket.
• It keeps your tax payments current, so you do not owe the government extra money later.
• It happens automatically, so you do not have to worry about missing a deadline.

Common mistakes to avoid

• Do not assume this payment covers your entire tax bill for the year, as your final tax rate depends on your total income.
• Do not forget that the shares sold to cover taxes are no longer yours to keep or sell later.

Words used on this page

• Shares: Small units of ownership in a company.
• Withholding: Money taken from your pay by your employer to cover your taxes.
• Vest: The moment when you officially own your stock awards.
• Restricted Stock Unit (RSU): A promise from your company to give you shares once you complete your work requirements.