Restricted stock units (RSUs) are a form of equity compensation that grants employees a specific number of company shares subject to a vesting schedule
Tax-wise, RSUs are treated the same as receiving a cash bonus.
You don’t need to exercise RSUs as you already own the shares.
What are RSUs?
Restricted Stock Units (RSUs) are not stock options — rather they are a promise by the company to give you a specific amount of stock at a future date with a strike price of $0.00. That’s right, it’s essentially free money (in the form of shares). Ok, maybe not free money, you ARE working after all and this is part of your compensation.
Unlike ISOs and NSOs, with RSUs you don’t exercise options to receive shares. This is great, as it means you don’t bear the costs associated with stock options. RSUs are more common with later-stage companies, especially those that have already gone public. For example, Amazon has famously relied on RSUs to be a substantial part of their compensation packages.
Taxes and RSUs
Tax-wise, RSUs are treated the same as receiving a cash bonus. The moment they vest, you will owe taxes, charged at ordinary income rates. Typically, your employer will withhold this estimated amount from your paycheck. And if you do subsequently sell the shares, the applicable tax rate will be charged at:
Long-term capital gains rates if it has been more than one year since vesting; or
Ordinary income rates if it has been less than one year since vesting
Like NSOs, the gain from the sale of the shares will also be calculated based on the difference between the sale price and the fair market value at the time of vesting. This is because you would already have been taxed when your RSUs vest based on their fair market value at that point.
Remember, most equity grants are subject to vesting. Until equity — in whatever form it has been granted — has vested, the company can take it back, so it's not really yours yet. "Vesting" means the release of the company's take-back right, and a "vesting schedule" is the schedule according to which that release happens.
Less risk, less reward
Don’t forget that you will owe taxes immediately upon your RSUs vesting. You may be able to ask your employer to take the estimated taxes out of the shares—instead of your paycheck. This means your employer will automatically liquidate some of the shares on your behalf to cover the taxes.
On the surface, RSUs can seem superior to stock options as they don’t carry the risk created by the exercise costs. However, because RSUs are generally offered by later-stage or already-public companies, their upside might still be lower. Further, companies will generally offer a lower number of RSUs than options.
A basic formula you can use to calculate your potential earnings from an RSU grant is: Your net gain = Total sale proceeds - (Ordinary Income Tax due at the time they vest) + Capital Gains taxes).
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for investment, tax, legal, accounting, or other professional advice. Vested does not provide investment, tax, legal, accounting, or other professional advice. You should consult your own investment, tax, legal, accounting, or other professional advisors before engaging in any transaction or equity decision.