Your company may offer you a choice for how to pay the tax, or it may have a mandatory method. The ways to cover the tax are:. In an extreme example, when a company stock goes to zero, the amount you are taxed on as income equals your capital loss.
Unlike stock options, RSUs are almost always worth something even if the stock price of your company falls. However, with options, the advantage or disadvantage is the built-in leverage. Think about it this way: If your company gave you a cash bonus, would you use that cash bonus to buy your company stock?
Remember that not only do you have risk in the stock, but you also have career risk as well. If things go poorly at your company, not only does your stock and net worth get hit, but you might be out of a job and a paycheck at the same time. However, if you did hold on to your RSUs and are fortunate to have capital gains good for you! Is there anything to do? A couple of ideas:. The two key guidelines are:. In summary, RSUs are a valuable piece of tech employee compensation plans. Make sure you are armed with the knowledge to make the most of them, and as always, if we can be of any help, schedule your free consultation here.
Table of Contents. You should consult your own tax, legal and accounting advisors. Even though you might not know your tax liability until you file your tax. For years, investing in Silicon Valley was predominantly reserved for ultra-wealthy venture capitalists, but that exclusive landscape is changing. The last year has seen three massive initial. That was in , but the sentiment still drives every decision we make. After 35 years of helping individuals, families and business owners plan for financial independence, our commitment to serving as financial life advocates is stronger than ever.
More ». The Plancorp Team Careers. By: Plancorp team July 30, Vesting schedules vary: Cliff vesting: All granted shares are delivered at once. Graded vesting: You become vested in portions of the granted shares over regular intervals.
Hybrid vesting: Your employer may offer a mix of cliff and graded vesting. Taxes Due Upon Vesting and Sale There is no tax at the time of grant since the shares are not technically yours yet.
Upon vesting: In the year your RSUs vest, their share value is considered ordinary income, taxed just as if you had received the same amount in cash. Even if you do not sell them , the share value is subject to federal, payroll Social Security and Medicare , and applicable state and local taxes for that year. Upon sale: After that, any change in value from the vesting price is taxed as a capital gain or recognized as a capital loss once you do sell the shares. Note: If you vest and then immediately sell your shares, it stands to reason that you incur neither a gain nor a loss.
Employees can use that sale to fund the tax liability. Even though you may need to wait for an exit opportunity to appear, the future benefit may be worth the wait if your company is on an accelerating growth trajectory and the value of your shares rises over time.
Compared to other forms of equity compensation such as stock options , RSUs are easier to understand. No purchase necessary. With stock options, employees have the right to purchase shares of company stock at a certain price, called the strike or exercise price.
Since some companies allow you to surrender shares to cover your tax withholding, RSUs typically cost less than stock options for the employee. Retains value. With stock options, when the strike price is lower than the market price, you could exercise your options — buy shares at the lower strike price, sell at the higher market price and profit from the difference.
That means your options could expire worthless. Once shares vest, they are yours to keep, even if you leave the company. RSUs provide employees with flexibility, particularly if the company is publicly traded. Tax consequences. For those with a large number of double-trigger RSUs, you could face a hefty tax burden once a liquidity event occurs and all your shares vest at one time. Even if your employer assists with managing the taxes, the amount of shares surrendered or cash payment withheld for taxes may not completely offset the actual tax owed.
Employees could be hit with additional tax consequences when it comes to tax filing time, depending on their tax situation. Consider charitable giving and other tax strategies. Uncertain future. Though the eventual award can be compelling, it can also disappoint if the company does not grow as planned. It can make sense to consult with a financial or tax advisor to formulate your plan of action, taking into consideration your personal financial circumstances when designing your strategy for holding or selling.
Consider diversifying over a few years. Then, diversify the new shares of RSUs that vest in other words, sell them and use the money to invest in other stocks. This will have minimal tax consequence. Continue to manage future RSUs and other equity compensation similarly. That typically involves having an investment portfolio that is appropriate for each major financial goal you have and an emergency savings account to cover basic needs for three to 12 months. There are multiple ways to diversify your portfolio, but some are more tax-efficient than others.
For instance, selling recently vested RSUs or recently exercised non-restricted stock options NSOs will likely have minimal tax consequence. If you hold exercised incentive stock options ISOs , it would be beneficial to sell your stock options that meet the special holding requirement i.
Stock options with a special holding requirement are taxed as long-term capital gains, and the tax rates for long-term capital gains are lower than regular income tax rates. You contribute to the plan through payroll deductions — similar to how you contribute to a company k — which then accumulates between the offer date and the purchase date.
Talk to an accountant or financial planner specializing in equity compensation if you need help diversifying your portfolio while minimizing taxes. Consider investing the proceeds from your equity compensation by funding tax-advantaged accounts, which are savings accounts that are exempt from taxes today or in the future or that offer other tax benefits.
For example, you could use the money you make to cover your ongoing cash needs to max out your k or Roth k account. Traditional k and IRA accounts provide a tax benefit upfront, while the Roth versions provide a tax benefit at withdrawal, and both provide a tax benefit while the account is growing.
If you are eligible for a health savings account HSA , consider using proceeds from your equity compensation to contribute to this. HSAs provide a tax benefit upfront and at the time of withdrawal, as long as they are used for a wide array of qualified medical expenses.
But if your company offers equity compensation as part of its benefits package, participating could lead to amazing financial returns.
Take the time to put in the necessary research so you can participate with confidence.
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