Restricted stock units, or RSUs, are a type of equity compensation that can be used by companies to incentivize employees. The majority of RSU packages are subject to vesting periods, meaning they don’t become yours until you meet certain criteria set by the employer. It’s important that employees understand how RSUs work, because this will help them decide what kind of offer to accept and how much stock to look for as part of their compensation package.
While the details of RSUs can be pretty complicated, this guide will give you a solid understanding of how they work and what they mean for you.
What does RSU stand for?
RSUs stand for restricted stock units. They’re a form of equity compensation, which means that you will receive a certain number of shares in your employer’s company as you vest.
What are restricted stock units, or RSUs?
RSUs are a form of equity compensation, which means that employees are awarded company stock.
In most cases, RSUs are part of the company’s stock and therefore subject to vesting schedules. In other words, when an employee earns an RSU award they do not immediately get to keep it; instead they have to wait until certain conditions have been met before they can take home their hard-earned reward.
How does RSU work?
When it comes to restricted stock units, the main thing to remember is that they’re a grant or award to employees. You don’t have to buy them, they are given to you over a vesting schedule.
RSUs are a type of equity compensation that’s issued by a company to an employee, usually over a period of time. When shares are received or transferred to the employee (according to the vesting schedule), they represent ownership and common stock voting rights within the company.
The vesting schedule for an RSU can be structured so that it vests over time—such as over a period of four years—or all at once after two years, for example.
RSUs are commonly received in two ways:
- For new employees, RSUs are usually part of an employee’s initial compensation package and may also be given after certain milestones have been reached (e.g., tenure).
- For existing employees, RSUs may also be issued on an annual or performance basis.
How much RSU should I take in a job offer?
If you’re lucky enough to receive an RSU grant, you might be wondering how much money you should accept. As with any financial decision, it’s best to start by considering your goals.
For example, if you’re saving for retirement and have a relatively short time horizon before you’ll be stopping your career and entering early retirement, then getting an RSU distribution earlier rather than later would be better because if you leave before vesting you forfeit those shares.
How much RSU you should accept depends on your personal financial situation, the company’s plan for vesting, and some guesswork.
- How much do you need to make right now? If you’re living paycheck-to-paycheck, then having a big chunk of your compensation be RSUs may be leaving your cash flow a bit tight. On the other hand, if you already have savings and investments that can cover your basic needs for at least a couple years, then taking an offer with a more deferred compensation (i.e. RSUs) might be a good idea—you’ll still get access to cash if necessary but won’t feel rushed into accepting an offer before you’ve had time to consider all of its details.
- How long will it take before I get access to my stock? Pay attention when negotiating your RSUs: some companies offer them immediately after hire (which could mean receiving several thousand dollars worth of shares right away), while others require employees to wait until they’re vested or until they leave the company before they receive anything. You also should consider how long vesting periods are generally in place; these can vary widely.
What is RSU income?
RSU income is the money you receive when your company gives you a stock award as part of a restricted stock unit plan. To calculate RSU income, you can multiply the number of shares received by the market value/stock price at the time it vests. The income is recognized the year you receive the shares.
Are RSUs taxed?
Yes, restricted stock units, or RSUs, are taxed as income at the time of vesting. When your RSUs vest, you will have to pay taxes on them. The value of the shares at that moment will be used to determine how much you owe in taxes.
What is the tax rate on RSUs?
RSUs can have two tax rates due at two different times – upon vesting and upon sale.
When you vest in your shares of stock, you don’t receive any special tax treatment for this portion and are taxed at your ordinary income tax rate. It’s good to note that sometimes your company will withhold, or sell enough of the shares, to cover the appropriate state and federal income taxes when the RSUs vest.
If the value of your shares increases or decreases once they are transferred to you, you’ll have a capital gain or loss to recognize. If it’s within 365 days since vesting, you’ll be taxed at a short term capital gains rate (usually same as your ordinary income tax rate). If it’s more than 365 days since vesting, then you’d be taxed at long term capital gains rate (this is typically a lower tax rate).
How are RSUs taxed?
You’ll have to pay taxes on the value of your RSUs at the time of vesting. This can be a source of confusion, so let’s break it down:
- When you receive an RSU grant, it’s worth nothing and taxed at nothing until you have earned and are transferred actual shares in your company. The value only becomes real after transferred to you and then it’s considered part of your income for that year. As such, they are taxed as income (as opposed to capital gains), which means they’re subject to income tax, just like any payroll taxes you may owe on earned wages or bonuses during that year.
- Once your RSUs vest, their value is treated as ordinary taxable income for federal purposes. The value of your shares will be derived by multiplying the number of shares that have vested by the stock price at time of vesting. For example: if an employee receives 2,000 shares of RSUs worth $100 each, that employee will have earned, and will owe taxes on $200,000.
What’s the difference between an RSU and an ESPP?
If you work at a company that offers an RSU, they are likely to also offer an ESPP.
Employee stock purchase plans, or ESPPs, are a type of employee benefit that allows you to purchase shares of your company’s stock at a discounted price. You pay for the shares of your company’s stock, or contribute to your ESPP, through automatic payroll deductions.
RSUs, on the other hand, are a way your employer can grant you company shares. With RSUs, employees receive a certain number of shares in their company as they vest.
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