Are RSUs part of your compensation package or are you looking at a position that offers RSUs? RSUs can become a significant part of your net worth over time. It’s important that you understand how they work, how they are taxed, and how to manage your RSU compensation. This guide will tell you everything that you need to know about Restricted Stock Units (RSUs).
What are restricted stock units, or RSUs?
RSUs are a form of compensation offered by a firm to an employee in the form of company shares. RSUs are generally subject to a vesting schedule, meaning the stock does not fully belong to the employee until such a time it is vested. During the vesting period, the stock cannot be sold. Once vested, the stock is given a Fair Market Value and is considered taxable compensation to the employee. Once vested, the employee can sell any shares they own.
Examples of companies that offer RSUs as part of employee compensation are Adobe, Akamai, Facebook, Google, and Logitech.
How does an RSU work?
An RSU is offered to an employee, generally as an incentive to stay with the company and help the company perform better. If the company does well, the stock price will increase, which helps the employee’s RSUs increase in value. It’s a win-win.
The company generally releases a set number of the company stock to the employee on a vesting schedule. Here is an example:
John gets an offer of employment from a company who offers him a salary, benefits, and 1000 RSUs. The company will release 200 shares per year for 5 years to John. As these shares vest each year, the Fair Market Value of the shares at the time of vesting is added to John’s taxable income for that year. John pays ordinary income tax on that value.
As they vest, John can choose to sell his shares, keep his shares, or sell some and keep some. They become like any other stock someone would own. If the shares increase in value after they vest, and then John sells the shares, he will pay capital gains tax on the difference between the Fair Market Value in the year of vesting and the sale price.
Why do companies give restricted stock units?
RSUs are a compensation and retention tool for employers. The benefits of a company issuing these is that employees who have shares in the company they work for are more likely to perform in a way that would help the company grow and do better, and in turn that would make their shares do better.
RSUs also serve as a retention tool because if an employee has unvested shares, they’re more likely to stay with the company until the shares vest and the money becomes theirs. If they leave before their shares vest, the company gets to take them back. Another benefit for the company is that the vesting schedule allows the company to dole shares out much more slowly to avoid diluting their shares.
What are the advantages of restricted stock units?
The advantages of a restricted stock unit is that the employee gets to share in the growth of the company they spend their time working for. As the shares vest, the employee can then either keep them or sell them. If the employee sells the shares, they can either use that cash for something now, or reinvest in other investments to diversify their portfolio.
RSUs also allow the employee to feel that they are more a part of a company that they work for because they own a part of the company in the form of shares.
Another benefit of restricted stock units as a compensation tool is that it is quite simple. Once the shares vest, and aren’t in a black out period for selling them, the employee can sell them at any point. Taxes are much more simple than stock options with restricted stock units as well.
What are the disadvantages of restricted stock units?
One disadvantage of having RSUs as a form of compensation is that the money is not yours until the shares vest. If you leave the company or are fired before your shares are fully vested, then those shares go back to the company. You can’t count on the money in the RSU account until it is vested.
Another disadvantage is that your shares are a risk for the company doing well or not. If the company does not do well, the shares can drop in value. As long as the shares are not vested, they are an unfunded promise to pay at the share price the stick is at when it vests.
The other disadvantage to RSU compensation is the taxation. RSUs are taxed as ordinary income as they vest, and the employee has no ability to time their taxes as they would with stock options.
How do RSUs differ from stock options?
Stock options give an employee the right to purchase company stock at a determined price within a specified window of time. If the company stock increases from the time of offer to the time the stock options vests, an employee may be able to purchase the stock at a discounted price from the actual market value at time of purchase. Taxes can be a bit more complicated with stock options than with RSUs.
RSUs are much simpler. The employer offers a set number of shares to an employee for various reasons (time in service, job performance, etc). At the time these shares vest, the employer can either release the stock to the employee, who then has the right to sell the shares, or the company can give the cash equivalent of the value of the shares to the employee.
Is it better to take RSU or stock options?
This really depends on the situation. There are pros and cons to both stock options and RSUs. If you need the money more quickly or you know you need cash at some point from this compensation offer, RSUs will be the way to go because unless the stock falls to nothing, they are guaranteed to produce some income versus stock options, which may or may not be worth anything when the option is there to buy stock.
When looking at taxes, stock options have better tax treatment because you can time the taxes on them. RSUs are always taxed as ordinary income as they vest, and the employee cannot time when that happens.
RSUs are also less risky than stock options. Stock options require an increase in a company’s stock price to have value. With a stock option, if the price of the shares stays at the grant price or even drops in value, your options will be worth nothing. With an RSU, stocks are granted in the form of full shares, so as long as the share is worth more than zero dollars, the employee walks away with something as the shares vest.
What should I do with my restricted stock units?
This depends. If you are vested in the RSUs, that means you own the stock. In general, owning a high concentration of one company in your portfolio puts you at higher risk than a diversified portfolio would. If your RSUs are a large part of your portfolio, selling some to diversify may be a good idea.
Can I negotiate an RSU?
If the company you work for, or are considering working for, can be bought or sold in the stock market (search for your company here if you aren’t sure), they could offer RSUs. Not all companies offer this. RSUs are more common in tech companies. If your company does have an RSU plan for their employees, you certainly can negotiate this as part of your compensation. If the employer can’t offer you more salary, an RSU might be a good addition to your compensation package instead.
Taxation of restricted stock units
Like any other form of compensation, the IRS wants its fair share of your income. RSUs are no exception. At the time you are offered an RSU plan (called a Grant), there is no taxable event. Until you actually have control of the RSUs in the form of shares of the company, you do not need to pay taxes on them.
The IRS wants taxes when compensation becomes recognized, or is no longer able to be taken back by the company. Once you have shares in an RSU that vest (becomes yours), the company can no longer take them back, and you must pay ordinary income taxes on the fair market value of the shares at the time they vest. This is the case even if you do not sell the shares of the stock that you now own.
Most of the time, the company will withhold the appropriate state and federal income taxes when the RSUs vest. Ensure you check this withholding so you don’t get hit with a surprise tax bill come tax season.
What are the four types of taxes you will owe on your vested RSU stock (ordinary income tax)?
- Federal income tax
- State income tax (if your state has income tax)
- Social Security Tax
- Medicare Tax
What happens when you sell the shares of your stock?
You likely already paid income tax on the fair market value of the shares at the time they vested. So that portion of the stock will not be taxed again.
Do you pay taxes on the growth?
If there is growth of the stock from the time you got the vested shares to the time you sell, you will pay capital gains taxes on that growth. Capital gains taxes come in two forms: Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG). LTCG are taxes on stock you sell after owning it for 365 days or more. STCG are taxes you pay on stock you sell that you have owned for less than 365 days. Long term capital gains tax rates are lower than STCG.
Are restricted stock units taxable?
Yes, RSUs are a form of income and are subject to federal income tax.
How are RSUs taxed?
Upon vesting, the amount is considered as ordinary income. If you hold on to your RSU stock, and the stock gives you dividends, then you’ll have to pay ordinary income taxes on those dividends. If you sell it after the stock price has increased, then you will owe capital gains tax.
Does RSU show up on W2?
RSUs do show up on form W-2. The total value of vested RSUs at the time they vested will show up on your W-2 as taxable wages. You can elect for the employer to withhold taxes from your paycheck when you get RSUs that vest. This way you don’t have to pay estimated taxes every quarter and you avoid under-paying taxes and owing a large amount when you file taxes.
How are taxes withheld with RSUs?
Some companies will withhold enough RSU shares upon vesting, to help cover your federal income tax obligation. In this case, your employer will deduct the number of shares needed to cover the tax withholding and deposit the remaining net shares in your account.
Other companies will deduct your estimated taxes owed out of your paycheck. Some will allow you to choose how you pay your tax on vested RSUs by paying them either out of your paycheck, directly to the IRS, or with vested shares. Other companies don’t give you a choice on how they withhold taxes.
It is best to check with your particular plan to see how taxes are withheld. The amount withheld depends on your personal tax withholding status and estimated tax liability.
Below is an example of how the restricted stock units tax withholdings might work:
# RSU shares vested
RSU stock price
Income Received/Taxable Amount
Sample Tax Withholding Rate
Shares Withheld to Pay Taxes
Net Shares Deposited to Your Brokerage Account
($5,000 x .35)
RSU Vesting Period
The period between the grant date and the vesting date is known as the vesting period.
Do RSUs have a vesting period?
Depending on your contract, RSUs can vest every month, quarter, or year. This schedule will vary depending on the company and can be over a period of many years.
Usually, a company will release a set number of shares over the specified vesting schedule. This allows the company to control how much stock is on the marketplace and is available to be sold. It also allows the employee to pay taxes on the shares over time rather than all in one tax year.
Can vested RSUs be taken away?
Vesting means you own the shares. In general, your company cannot take back shares that have vested even if you leave the company.
RSU Vesting Schedule
RSUs are almost always subject to a vesting schedule.
What is a vesting schedule?
Vesting schedules are incentive programs set up by employers to give employees access to unvested shares or funds. Employers use these incentives to reward employees who remain with them for a long time.
What are the 3 types of vesting schedules?
1. Graded vesting: this is when you receive shares over a regular period until you receive all of the shares. For example:
In 2021, your employer grants you 1,000 RSUs, and it will vest 25% annually.
250 shares vested in 2022
250 shares vested in 2023
250 shares vested in 2024
250 shares vested in 2025
2. Cliff vesting: after a certain amount of time has passed, employees earn a certain percentage. For example:
In 2021, your employer grants you 1,000 RSUs and it will vest in 3 years.
0 share vest in 2022
0 share vest in 2023
1,000 shares vest in 2024
3. Hybrid vesting: this is a combination of both of the above. Employers are only eligible for stock options after a certain amount of time has passed and after attaining a certain objective. For example:
In 2021, your employer grants you 1,000 RSUS. It will vest in a year at 25% in year 1, 50% in year 2, and 25% in year 3.
250 shares will vest in 2022
500 shares will vest in 2023
200 shares will vest in 2024
Other common RSU questions:
How do I calculate the cost basis for restricted stock units?
The basis of your RSUs should be calculated by the plan that holds the RSUs. For example, if your plan holds the stocks in Fidelity, Fidelity should have your basis information in your account. You’ll be able to see your basis for each share that has vested by looking at your account statements. Your basis is the amount that each share was worth when it vested.
Can you sell RSUs at any time?
In general, you can sell RSUs as soon as they vest. In some circumstances, to avoid insider trading, there is a black out period during which time you cannot sell your shares. There are also open trading periods in which you can sell your shares. You will need to check with your particular company to see if there is a black out period and how long that lasts.
Should I sell restricted stock units immediately?
Due to the way RSUs are taxed, it is generally advantageous to sell your vested shares right away. This is mainly for risk-management purposes. Because you pay income tax on vested shares as they vest, it doesn’t matter if the shares decrease in value, you will have already paid taxes on them, and therefore a decreased value of shares means you paid a much higher percentage of tax on them then had you sold them right away.
Another reason to sell your shares quickly is that it avoids your portfolio from becoming highly saturated in one single company. It’s a good idea to have a diversified portfolio, and RSUs are not diversified because they are shares all owned with one company.
To protect yourself against any major company downturn, as well as having to pay high taxes on shares that have decreased in value, you may want to consider selling some or all of your shares as they vest. There are circumstances in which you might want to keep some shares, but it is best to check with your financial planner to see the right plan for you.
Can you lose money with RSU?
You can lose the value of your stocks in your RSUs if the price decreases after your RSUs have vested. Not only are you potentially losing the value of the stock if the price decreases, you’re also losing money on the taxes you paid on the RSUs because you have to pay those regardless of whether the shares lose value.
What happens to RSUs when you quit your job?
You lose all your unvested RSU shares when you quit your job. For the vested RSU shares that are already in your brokerage account, you can keep those since it is your money as soon as it vests.
One RSU Strategy
If you just sit back and do nothing and work for a company for a really long time, you might end up accumulating hundreds of thousands of dollars in one company stock. We have client at District Capital – when we met her, she had approximately $800,000 worth of money all in one stock.
You might be thinking, “Wow, that’s really amazing that she has managed to accumulate that much money over time!” Well, it is amazing, but she was also holding that amount of money all in one stock, which can be extremely risky. You never know what might happen to a company. It might be great now, but what if there’s an accounting scandal in the future? Or what if it goes bankrupt because of the pandemic? Look at General Electric (GE). It was considered a safe stock until it wasn’t. At one point, its value dropped to a fourth of what its value was years ago.
One way to lower risk is to sell your RSU shares that you receive as soon as they vest. You can then invest them in a diversified basket of stocks or bonds. Diversification is a really key component in investment planning. Now, what you’re probably thinking is “it’s going to be really hard for me to get rid of these Google shares. I’ve only seen them go up over time and I’ve sort of fallen in love with these shares.” But ask yourself this: if you have $50,000 worth of money to invest now, would you place it all in just one stock? If you think of it like that, most people would not put their entire $50,000 all into one stock knowing how risky it is. Keeping your RSUs in one stock is the same concept.
Get expert advice on your RSUs
Here at District Capital Management, we can help advise you on the best way to manage your RSUs, including a tax-efficient strategy for your RSUs. Feel free to schedule a free discovery call to see how our financial planners can help you today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.