Publicly traded companies usually offer equity to employees in the form of restricted stock units (RSUs).
What are Restricted Stock Units (RSUs)? #
An RSU is an unsecured promise from your employer to give you shares of the company’s stock (or the cash equivalent) on a future date if certain restrictions are met.
Restricted Stock Units are not actual shares of company stock, and therefore they do not carry voting rights or provide dividends.
Unlike with stock options, with RSUs you don’t have to pay anything to get the stock. Generally, you will only be liable for paying taxes when you receive the shares, and if your tax rate is high, you may also owe taxes at year-end.
This term refers to the date an employee receives RSUs. When you receive the RSU, you can’t use it to purchase stocks right away. You still need to wait until the RSUs vest.
How do RSUs vest? #
RSUs are usually subject to either single or double-trigger vesting. In order for you to receive your RSUs, certain objectives must be met:
- Time-based (e.g. you must stay at the company for a certain amount of time)
- Milestone-based (e.g. your company must IPO or be acquired)
- A combination of the two (most RSUs issued at privately held companies have both a time-based and liquidation condition)
When you meet these restrictions, which should be outlined in your RSU grant, your RSUs vest and you receive your shares.
RSUs are taxed as soon as they vest and are liquid. In many cases, your employer will withhold some of your RSUs as payment for taxes owed at the time of vesting.
You might also get the option to pay those taxes with cash in order to retain all of your vested RSUs. Either way, your RSUs will be taxed at ordinary income rates which could be as high as 37% at the federal level plus Social Security and Medicare taxes, depending on your income. You may owe additional taxes at the state level, depending on where you live.
Taxes are generally due on that date of vesting. In non-U.S. locations tax implications may vary.
Your tax obligation may be satisfied through share withholding or cash payment, depending on the terms of your plan.
- Share withholding. Some of your awarded shares are withheld for taxes and you receive the net after-tax shares.
- Cash payment. You pay taxes in cash and keep all of your awarded stock.
Your withholding rate is likely to be lower than your effective and marginal tax rate. In other words, you might need to save
Key Decisions with RSUs #
- Sell or hold RSUs after vesting? What are the tax implications?
- Set withholding of RSU shares at 0%, 22%, or 37%? (this reduces your net shares after taxes)