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RSUs Decoded: Essentials, Vesting, Taxes and Selling

RSUs Decoded: Essentials, Vesting, Taxes and Selling

April 08, 2024

Compensation packages that include restricted stock units (RSUs) have become common as companies want to give employees a stake in the game. It's especially popular for early startups trying to attract top talent on a budget. Plus, if the company does well and the stock price goes up, everyone could benefit. 

But, managing RSUs can get a bit tricky when you start thinking about taxes, vesting schedules, and selling. With many of our clients holding significant RSUs, we've honed our expertise in navigating these areas. 

What are RSUs? 

RSUs are a way for companies to grant employees actual shares of company stock once they meet certain conditions, usually related to time or performance milestones. Unlike stock options, you don't have to spend any cash upfront for RSUs. 

Advantages of RSUs 

  • Simplicity: RSUs offer a straightforward way for employees to receive ownership in their company without the complexity of stock options. 
  • No purchase necessary: Unlike stock options, RSUs do not require employees to buy shares, making them more accessible. 
  • Value retention: RSUs retain value if the company's stock price is above zero, giving employees a tangible financial benefit. 
  • Flexibility: Once vested, employees have the flexibility to sell shares to fund other financial goals or hold onto them for potential future growth. 

  Types of RSUs 

  1. Single-trigger RSUs: These RSUs vest over time, usually after a certain number of years. 
  2. Double-trigger RSUs: Double-trigger RSUs incorporate added conditions beyond vesting, often related to performance milestones or corporate events such as mergers, acquisitions, or IPOs. 

Tax Implications When RSUs Vest 

When your RSUs vest and get transferred to you, the fair market value of the vested shares is considered taxable income. This income is subject to federal, state, and payroll taxes, like your regular salary or bonus dollars. 

Typically, pre-IPO companies will have a “double trigger” stock plan to help you avoid the tax event until the company goes public or another liquidity event occurs.  Otherwise, you could be responsible for taxes on stock that’s not sellable. 

It's quite common for people to get an unwelcome tax bill due to vesting schedules, so it’s crucial to understand tax obligations and plan accordingly, which may include making estimated tax payments throughout the year. A tax-intelligent financial advisor can help you build these strategies. 

Navigating the Sale of Your Shares 

Selling vested shares for employees of public companies is relatively straightforward since shares can be sold on the open market. Your financial advisor can help you in figuring out the best timing and quantity of shares to sell based on your financial goals and tax obligations. 

On the other hand, employees of private companies may have a tough time selling vested shares due to the absence of a readily available marketplace. 

When you opt to sell these RSUs, you will be taxed on the difference between their value at receipt and the gains realized upon sale—not on the total value of the shares. It's vital to meticulously scrutinize your reporting statements as you prepare your tax returns to avoid potential double taxation. (If you notice that box 1e on your Form 1099-B shows a $0 instead of the cost, it will need to be adjusted.) 

You will also want to plan for the proceeds of your stock sale. Options may include reinvesting the funds into your portfolio, paying off debt, or buying a home. You may even consider donating your stock to charity and gain a tax advantage. 

In summary, RSUs offer tremendous advantages for employees. With careful management of tax obligations and a well-crafted long-term strategy, these shares can significantly contribute to your financial goals.  

If you need help understanding all these RSU implications as they fit into your financial plan, don't hesitate to reach out to us. We would be happy to set up a free, no-obligation consultation.