When it comes to compensation, many companies are now providing equity and stock-based benefits to their employees. Each type of benefit has its own set of rules, and it’s essential to understand the nuances of each type. One form of equity-based compensation is restricted stock units (RSUs).
Here’s what you need to know about this form of equity-based compensation.
This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal and financial planning professionals if you want more information about restricted stock units.
What Are Restricted Stock Units (RSUs)?
Restricted stock units (RSUs) are a promise from a company to issue a certain number of shares of company stock to an employee when certain time-based or performance-based conditions are met.1 Time-based conditions could require that the employee be at the company for a certain amount of time or be subjected to a vesting schedule.1 Performance-based conditions could include when a company goes public, when a company is sold or acquired or when a company reaches specific growth and financial milestones.1
RSUs hold no intrinsic value until they vest at which time the employee is issued shares of common stock. These issued shares create taxable employee compensation income based on the stock's market value at the date the shares are delivered. For publicly traded companies, these shares can either be held as an investment or immediately sold. This can encourage employees to take ownership of their work, as the potential financial rewards are based on how well the company is doing. RSUs also incentivize employees to stay with a company, as a typical vesting schedule is around four years, meaning employees must stay that long before they are eligible to receive the benefit of their RSUs.1,2
Restricted Stock Units (RSUs) vs. Stock Options
Some people confuse RSUs with stock options. Like RSUs, a stock option grant often has a vesting schedule. For example, 25% of the grant vests each year over 4 years. Unlike RSUs, once vested, an option allows the purchase of company stock at a specific price for a predetermined amount of time.Exercising and selling stock options have specific tax consequences that can be different based on whether they are qualified or non-qualified. Be sure to work with a tax professional or financial planner to understand the impacts.
What Happens to Your RSUs If You Leave a Company?
Usually, job termination results in losing all unvested RSUs. Whereas in the case of a qualified retirement, you may be allowed to keep unvested RSUs and have them continue vesting according to the schedule. You should review all documentation with your financial advisor, legal professionals and tax consultants to ensure that you understand the ramifications of what’s being offered.3
Make sure to review the provisions for what would happen if you took a leave of absence, became disabled or died while holding RSUs. If your RSUs would transfer to your next of kin, ensure that you have a beneficiary established.3
Tax Considerations for RSUs
RSUs are taxed like a regular paycheck at the time they vest and shares are issued. This means that they’re subject to federal income tax, Social Security taxes, Medicare and state/local taxes. You’ll also be expected to pay the taxes when the shares are issued. Many employees choose to surrender some shares of the company stock to cover the associated taxes. 3
Remember, working with your financial team is important to make sure you make the most of your RSU options. They are complex and can have a variety of financial and tax implications, so working with experienced guides as you navigate your options is invaluable.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.