Restricted Stock Units (RSUs)
For a broader overview of equity compensation: click here
What is an RSU and how do they work?
RSUs are one of the simplest and most common forms of equity compensation. They are essentially a promise of a given quantity of stock at a future date. The recipient receives a “grant” that details the amount of time or performance milestones attached to the future receipt of the shares. You don't actually receive the shares until they are vested (nor can you exercise voting rights, since these shares don't actually exist yet). It’s important to review the grant agreement to understand how and when you will receive your shares, as well as the impact of certain contingencies like separation of service, change of control, or death and disability. Upon vesting, the company will issue those shares to the employee, less any withholding for taxes.
What are the tax consequences of RSUs?
The grant price doesn’t matter at all for tax purposes, because you don’t own the shares yet. Upon vesting, the value of the shares you receive is treated just like a cash bonus and is subject to taxes just like earned income. Your employer will withhold 22% of the award for income taxes (the federal supplemental income rate), and a portion of the stock may be surrendered or sold to satisfy the withholding requirement. When tax day rolls around, that 22% withholding may or may not be sufficient. If you’re in a higher income tax bracket, you’ll end up owing the difference, so be prepared to write that check. When you sell your shares, you’ll be taxed any increase in value from the vesting date at short or long-term capital gains rates (e.g. the same as if you had purchased shares on the vesting date).
What if my plan allows me to defer the distribution of the shares?
Some plans will allow you to defer the distribution of the shares and continue to hold the units until a later date, post-vesting (e.g. retirement). This can be advantageous from a tax perspective if you can coordinate the future payment date and tax recognition with your overall plan. However, there may be events that can accelerate any deferred payments, and you’re exposed to the stock’s performance over an extended period of time (for better or for worse).
Should I sell my RSUs when they vest?
Once the shares are vested and taxes are accounted for, you own the company stock just as if you had purchased it on your own. If you sell immediately, there are no additional taxes because there is no capital gain or loss. The key question to ask yourself when deciding whether to hold the shares or sell them immediately is this: “If I got a cash bonus instead, would I use it to buy shares in my company?” If not, that’s a good indication that you should just cash out now, or as the Steve Miller Band put it, “Go ahead, take the money and run!”
RSU Checklist
If you have received a grant of RSUs, or are unsure what to do with your RSUs when they vest, here’s a detailed checklist to be sure you’re asking the right questions:
