Tax And Financial Planning Strategies For Employees Receiving RSUs

When you work for a publicly traded company, company equity may be part of your compensation. Receiving stock awards in the form of restricted stock units (RSUs) comes with distinct vesting schedules, risks, and tax implications that you will need to consider. This is a discussion of tax and financial planning strategies for employees receiving RSUs.

Receiving RSUs

Restricted stock units are promises to give stock to employees when certain conditions are met. They may be offered as part of a sign-on bonus, or they may be part of your annual compensation. The stock unit has no real value to you until it vests, meaning it becomes your asset. Vesting periods can last several years to incentivize you to stay with the company and collect your stock. If you leave your company before your RSUs vest, you receive nothing.

Where Taxes Come In

Once your stock vests, it is considered taxable income. Employers may opt to withhold a portion of your shares to pay for your income taxes. Once you receive the remaining shares, you may do what you wish with them.

When the RSU becomes a stock in your possession, it follows all the ordinary capital gains and dividend taxation rules. This can be a source of confusion for some investors because they may have viewed the RSU as their asset for a year prior to receiving their vested stock.

Let’s go through an example. You were hired at a large, publicly traded company and received a generous grant of 2,000 RSUs with a fair market value of $50 per unit as a sign-on bonus with a one-year vesting schedule. You would have likely valued that at $100,000.

Income Taxes

Let’s say your company had an incredible year and once that year passed, the actual value of the 2,000 shares of stock became $100 per share. Since that full $200,000 would be considered taxable income, the company could opt to withhold shares to pay for taxes. Let’s say 30% of your income is taxable in this case. You would receive 1,400 shares in this case, with the remaining 600 going toward taxes.

Even if your company had a horrible year and the stock shares became worth $25 per share, you would still owe income taxes on 100% of the stock. You cannot write off any losses because the stock was not yours until the vesting date.

Capital Gains and Losses

Continuing with the example above, you have a choice once you receive your company stock. You can sell immediately, sell within one year, or hold the stock for longer than one year. If you sell immediately, no additional taxes apply. In the earlier example where your stock was worth $100 per share and you received 1,400 shares after taxes, you receive the full $140,000 in cash.

If you had a lot of confidence in your company and chose to hold on because you felt like it was a great investment, you would be subject to capital gains or losses depending on the direction the stock moves.

Let’s say the stock rose over the course of the next six months and is now starting to fall. Since you worry about how far it could fall, you sell everything at the six-month mark at $125 per share. You would have short term capital gains of $35,000 in this case, which would be taxed as ordinary income.

Continuing this path, let’s say you instead chose to hold onto the stock for at least a year. When you hold a stock for at least a year, you are then subject to long term capital gains, which is a more favored tax status. After the six-month rally and decline, the stock continued to fall to $101 per share. If you sold then, you would have a small taxable gain of $1,400. The top federal bracket for this would be 20%.

If the stock fell to $75 per share, you would have a capital loss of $35,000. You can use capital losses to offset gains in other portfolios or you can write $3,000 against your income and carry your other losses forward to future years.

What You Should Do

I like to ask people who receive RSUs the following question: If your company gave you cash instead of a stock award, what would you do with it? If the immediate answer that comes to mind is not, “I would buy stock in my company,” consider selling your stock immediately upon vesting.

If you have financial goals that you’d like to hit by a certain time, like buying a home, education funding, starting a business, or retiring, holding a single concentrated stock exposes you to disproportionate risk which could dismantle the best-laid plans. Individual stocks always run the risk of falling to $0 but the overall market will not. I recommend understanding your goals and reinvesting the proceeds from the stock sale in a diversified portfolio in line with your financial goals.

If you answered that you would buy the company stock, I would still urge caution. If you take this path, you either need to have sufficient diversification and liquidity to achieve your goals in other portfolios, be okay with potentially never meeting your financial goals, or be able to handle your portfolio going to $0 and being forced to rebuild. If you do take this path and find that you want to liquidate or diversify sometime down the road when assets are at a significant gain, there are several methods for managing risk and tax exposure you can take.

Overall, deciding your path is a delicate balance between risk, taxation, and your goals.

This informational and educational article does not offer or constitute, and should not be relied upon as tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.

Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6729057.1 (07/24)(exp. 07/26)