My company offered me RSUs as performance compensation. Should I accept?
October 11, 2020 11:49 AM   Subscribe

As part of a yearly process, my company has offered all employees a "bonus" in terms of RSUs (restricted stock units). I'm leaning towards accepting this grant, but I'm a bit uncertain given potential tax consequences. (I'm relatively new to the company, so this seems to be my first time.)

First, I acknowledge that YANML/are not my financial advisor.

I'm a complete newbie at stocks, etc., so go gentle and ELI5 if possible!

The RSUs are priced at $1000 at around 15 RSUs. Would that mean my taxable income would be $15000 ($1000 x 15), or is that just the divided up amount?

It says the first vesting date would be this month, and I believe it's 3 years or so for the duration of the vests (whatever that means).

The email also said that vesting of RSUs and withholding of shares to satisfy tax requirements are not subject to restrictions. Does that mean my company will take care of/do the tax withholding for federal/state/local so I don't have to worry about that?

I'd love to accept this award, as my company seems to be growing and flourishing, but I also want to be careful and not get any nasty tax surprises come tax time.

posted by thoughtful_analyst to Work & Money (13 answers total) 1 user marked this as a favorite
There is no reason I can think of to not accept an award of RSU's, you may have to pay tax on them when you eventually sell them and the company will likely sell some portion of those shares on their vesting date to cover an estimated amount of taxes, but that's several years down the line.

RSU's operate differently than stock grants, ISO's (Incentive Stock Options), and non qualified stock options. As with all things money related, don't trust the internet - go find a fee for service financial planner and get some advice but there is basically only upside to this.
posted by iamabot at 11:57 AM on October 11 [6 favorites]

I concur with iamnotabot's comment. I believe you will not have any tax liability until you exercise the options at with point a portion of the sale will be held back to pay taxes due.
posted by tman99 at 12:14 PM on October 11

Is the company already public?

The internet tells me that RSUs are taxed as income when they vest (paid from the RSUs themselves, not your wallet, if the company is public), with capital gains accruing from then on, and WebMD Google suggests that for that reason they should be sold as soon as they vest. Which is why I ask if the company is public, because the "selling them" part would definitely be affected, and would affect whether the taxes are paid out of your wallet or not.

Definitely see a financial advisor, but this article seems to lay out the landscape OK, or at least points out some concerns.
posted by rhizome at 12:26 PM on October 11 [3 favorites]

@rhizome, the company I work at is public, yes. It seems like the first vest date will be this upcoming week, so I'm not sure what that would mean in terms of taxability.

Also, in reference to my question, can somebody answer this? The RSUs are priced at $1000 at around 15 RSUs. Would that mean my taxable income would be $15000 ($1000 x 15), or is that just the divided up amount?

Many thanks for the helpful responses thus far!
posted by thoughtful_analyst at 12:56 PM on October 11

The general answer for any of this is "absolutely, accept them" but you're right to ask questions. Without knowing more details, you should look to do a "sell to cover" or "same day sale". Both should handle your immediate tax concerns.

Let's say that someone gives you 100 RSU. Typically, you aren't taxed until they vest. Imagine that they all vest at once, for a price of $50. That means that on the day of vesting, you will owe taxes on $5000: $50 * 1000 - no matter what happens to the stock after that date. That's the only real risk - you have the shares, but imagine that on the day after vesting your company goes bankrupt and the shares plunge to zero. You'll still owe taxes on $5000 come tax time, but you won't have anything of value to sell to get that money!

That's not good for anyone, which is where the "sell to cover" or "same day sale" comes in. In a "sell to cover", on the day of vesting your company will sell a number of the shares that cover your likely tax bill. So, if you have a 20% tax rate, you might owe 20% * 5000, or $1000. The company would sell 20 of your shares immediately and withhold the proceeds ($1000) for taxes. You'll get 80 shares instead of 100. You won't have any additional tax obligations until you sell them, whenever that is. And at that point you'd pay tax only on the difference between the price you sell and $50, not $0.

Same day sale is simpler - they just sell all the shares immediately, withhold enough to cover your $1000 tax bill, and you get $4000 instead of 80 shares. I would generally go with this one if offered, but sell to cover does take care of your main tax concerns so it's fine if that's what's offered.

So as long as your company offers a same day sale and/or sell to cover you should be ok for tax purposes. Of course you should talk to a professional, but if you're not going to do that - at a minimum talk to someone at your company that you trust who has gone through this before.
posted by true at 1:35 PM on October 11 [6 favorites]

Yes, accept the RSUs -- this is your compensation -- you wouldn't say no to a 5k bonus (15 shares x $1000 stock price / 3 years) would you, even though it has a higher tax rate? (Obv., if for reasons, you're trying to stay below a certain income for a certain period of time, then maybe you wouldn't want to accept them, but these will be niche situations.)

To get comfort on how tax *withholding* by your company works, email your HR department. They will let you know: 1) When the RSUs "vest" -- as in, they actually become YOURS -- which stock brokerage do they go to, and 2) what is the logic by which the stock brockerage "withholds" the amount for taxes?

I am not your tax advisor, and I am not your HR department. But if I were to guess, I would say, based on the fact you have 15 RSUs with a 3 year vesting period, this means, over the course of the next 3 years, you will become an owner of 5 RSUs each year. Your documents/HR department will clarify if you get all 5 in a specific date, or once every 6 mo in that year etc. etc. Assuming each RSU is a share of your company, then on each vesting date, you will get 5 x $ stock price of a share on that vesting date. If your company's stock prices each year, your future RSUs may become more valuable over time -- i.e., this is how your company tries to get you to stay longer and create more value for share holders like yourself.

The way my company treats withholding is that based on the amount I've told them to withhold on my regular income, they will ask your stock broker to withhold that %. Let's say your withholding is 20%. On a day when your stock vests, your stock broker will give you 4 RSUs, and "sell" the 5th RSU to cover 20% of taxes. This gets wonky b/c each stock unit might not perfectly be equivalent to how much you need to withhold, e.g., let's say you withhold 30%, which is 1.5 shares of 5 shares, so perhaps your stock broker will sell off 2 shares, give you "cash" in the form of .5 shares, keep the value of 1.5 shares for tax withholding, and give you 3 shares at the end. Depending on the sophistication of your company, they may also allow you special options, b/c sometimes people would rather just have all the stocks and pay cash on the taxes etc. but these more complicated choices are not going to be the default.

Usually, I find that the withholding done automatically is good enough. If you want to be extra safe, keep a buffer of cash aside in case you owe more on tax day. The next period that you would want to be careful of taxes is if/when you decide to sell your RSUs via your stock broker. There's a lot more complexity there, but basically, make sure you save a % of your stock value. E.g., if you sell off shares worth $1000, keep X% of withholding for the end of the year on taxes. If you have a lot to sell, it's worth proactively working with a tax advisor who can advise maybe paying on a quarterly cadence *ahead* of the tax due date to reduce your tax liability.

Last important thing to note -- unless you vest, those RSUs are NOT yours. Let's say, you vest these 5 shares this month, and then leave the company before your next vesting period. You will no longer get all those RSUs that have not vested. RSUs are incentive schemes to keep you with the company for longer b/c you have some visibility over your future compensation. That being said, you still keep anything you've "vested"!

Last tip, if RSUs is a common form of compensation for your company -- find a fellow employee who's been there for a while, ask them to explain it.

I am not a financial advisor/tax advisor/your HR department. Just sharing what I've observed in vesting/RSU compensation schemes in my work experience in the US.
posted by ellerhodes at 1:45 PM on October 11

Usually, I find that the withholding done automatically is good enough.

This is highly situation-specific. RSUs are considered supplementary income by the IRS. The IRS has decreed that supplemental income is withheld at 22% for supplemental compensation up to $1M, and 37% past that. In other words, your RSU withholding rate has almost nothing to do with your actual compensation or actual compensation rates.

Roughly speaking, someone who has a marginal tax rate of 22% will have their RSU correctly withheld. Such a person would earn $84.2K-$160.7K (single) or $168K-$321.4K (married), prior to deductions. If you earn less than that, the your employer will over-withhold your RSUs and you'll get a refund at tax time. If you earn more than that, your employer will under-withhold your RSUs and you'll owe money at tax time.

Oddly, the IRS does not allow provisions for changing this withholding rate directly. So, if you don't pay attention to your marginal tax rate, your RSUs may cause you a bit of a tax headache in April.

To be very clear, as other people have indicated, you will always end up ahead - there are effectively no situations [*] in the US tax code where earning more money results in more taxes than the extra money you earned. If your marginal tax rate is different than 22%, you may consider withholding a bit extra from your normal earnings (to increase withholding to compensate for RSUs) or claiming an extra allowance on your W4 (to decrease withholding to compensate for RSUs).

[*] outside certain scenarios related to welfare in the USA - ie, welfare cliffs.
posted by saeculorum at 2:44 PM on October 11 [2 favorites]

Also, in reference to my question, can somebody answer this? The RSUs are priced at $1000 at around 15 RSUs. Would that mean my taxable income would be $15000 ($1000 x 15), or is that just the divided up amount?

Rereading this thread, I don't think this has been answered very well.

Most companies offer RSU awards with a vesting schedule. A four year vest is common. The vest period is how long it takes you to fully receive your RSU award. The company wants this to be long to keep you employed at the company. Awards also have a vest frequency - awards commonly either "vest quarterly" or "vest yearly". That's how often each year you receive the RSUs. A yearly vest is common; that means once a year you'll receive some of the RSUs. Finally, RSUs have a vesting schedule - that's how the RSUs are allocated at each vest point. An equal vest is common, and results in the same percentage of RSUs awarded at every vest period.

There are a lot of subtleties to this. For instance, the "common" components I referred to are not universal. Some companies have three year vests. Some companies vest quarterly. Amazon, notoriously has an unequal vesting schedule so that more RSUs are awarded later in the award and fewer RSUs are awarded earlier.

But, let's say your company offers a more or less common four year vest, vesting yearly, with an equal schedule. That will mean your award is vested to you as follows:

First vest date: 25% × 15 RSUs = 3.75 RSUs. However, fractional vesting is very uncommon, so depending on how your company counts fractional RSUs, you'll be awarded 3 or 4 RSUs.
First vest date + 1 year: same
First vest date + 2 years: same
First vest date + 3 years: either 3 or 4 RSUs such that you end up with 15 RSUs total.

At each vest date, your employer will probably "sell to cover" your withholding.

First vest date: (assume 4 RSUs) - you'll vest 4 RSUs, worth $4000. The IRS mandates you withhold $880 of that. The company will sell 1 RSU immediately ($1000), and give you 3 RSUs and $120 in cash (usually in your next pay statement).
Second vest date: (assume 3 RSUs) - you'll receive 3 RSUs. Say the stock price is then $1200/RSU. You'll vest 3 RSUs, worth $3600. The IRS mandates you withhold $792 of that. The company will sell 1 RSU immediately ($1200), and give you 2 RSUs and $408 in cash (usually in your next pay statement)
... and so on.

Note, the stock price only matters on the RSUs you actually receive. If the stock price goes down, you'll pay less taxes in the future as the RSUs vest. If the stock price goes up, you'll pay more taxes in the future as the RSUs vest. However, importantly, you won't pay taxes on RSUs you haven't received yet. Hence, again, accepting an RSU award is always in your favor.
posted by saeculorum at 3:07 PM on October 11 [1 favorite]

Let me try to make this clear and simple. Read the document carefully but usually they are telling you that they are setting aside 15 shares of company stock for you and they will give you some every quarter for the next three years. So for three quarters they will give you one share and once year they will give you two shares. The shares are yours once you get them (that's the vesting part) If you leave before the date you are due to get more shares you miss out - you only get them if you are still an employee on that date they vest.

At the time that they give you the shares, the value of the shares are part of your compensation so it counts as taxable income. So there will be taxes due, just like if you got a cash bonus. I'm not sure what happens if you only get one share, the case I'm familiar with is more like getting 10 shares at $100@ rather than 1 shares @$1000. When you get 10 shares worth $100 each, the usual set up is that the broker automatically sells enough shares to cover the estimates state and federal taxes for the extra income that you earned. So, if you get 10 shares worth $100 each, that is $1000 in income, which means they might sell 3 shares and send the money as estimated taxes on your behalf to the government (this will show up on your paystub and your W2) and you will own 7 shares.

You can sell these 7 shares any time you want and just pay taxes normally on the capital gains.

By the way, even though you got the shares for free, since you paid taxes on them at $1000 per share, your tax basis would be $10. If the stock tanked the next day and you sold them for $400, you would be able to report a short-term tax loss of $600 per share and thus more or less recover the taxes paid. If the stock triple to $3000 per share, when you sell them, you only have to pay taxes on the $2000 per share that you gained after you got them.
posted by metahawk at 3:07 PM on October 11 [1 favorite]

You said that you're new to equity/RSU stuff and a bunch of the people above have tried to answer your specific question, so I'm going to share a couple of more ideas to help you find your sea legs around this type of compensation.
- If your company is a big, Silicon Valley company, they should have lots of internal resources about how RSU compensation works. Search your internal resources for things like "equity 101" or "how RSUs vest" and you should find some videos or wiki pages, or just ask your manager to point you to an explanation. Things like the vesting schedule, blackout windows (when you can and can't sell stock), and the platform for selling your stock will be specific to your company or in some cases your specific bonus/RSU grant.
- If you already have an accountant, they should be able to explain the impact of RSUs on your taxes to you.
- Wealthfront has a good guide general guide to equity compensation. A lot of it is about private companies, but it's still a very useful resource.

I am not an accountant, but the cliffs notes guide to the advice you've gotten so far is that if on every vesting date you sell all of the RSUs that you vested and stick that money in the bank until you file your taxes the following year, you will never end up with a tax consequence you can't cover. That also means that you won't hold onto your company's stock for any extended period.
posted by A Blue Moon at 3:27 PM on October 11

It is additional compensation, no reason not to accept. Instead of just giving you more cash, they are giving you stock that has the same value as that cash.

When the RSU vest you will owe taxes on the total value (# shares x RSU price).

Companies will often sell enough shares when they vest to cover the potential taxes.

The value of the shares and taxes paid will show up as additional compensation on your W2 and additional with-holding (taxes paid). When they vest you will likely see another line on your W2 indicating the additional compensation from RSU. When you do your taxes make sure you do not include the value of the RSU twice - it's already included in your W2 as income, you should not be reporting it as additional income. [Remember this it will save you lots of pain at tax time as typically the paperwork for RSU is confusing].

When vested, the shares will be placed in a brokerage account - you can sell them at any time just like a normal stock, the cost basis is the original price of the RSU. If you sell the stock in the future you may owe capital gains tax (if the price of the stock has gone up)
posted by NoDef at 6:39 PM on October 11

You definitely should accept the award. You won't lose money on this. That said, I heartily concur with NoDef that the paperwork around RSUs can be very confusing and in particular you should absolutely not trust your brokerage to import complete data to your tax software. The value of the RSU should indeed be already included in your W2 (uh, in particular, if you use Smith Barney's "Stockplan Connect" with TurboTax, and try to just naively enter your credentials and slurp up your past year's financial history, it doesn't import the cost basis, and you need to go back through your statements and enter it manually).

If it's not immediately obvious to you how to do your taxes once you've sold some of this stock, please consult a tax professional for your own peace of mind. It's not you - this stuff is confusing and it trips a lot of people up.
posted by potrzebie at 10:14 PM on October 11

I believe you will not have any tax liability until you exercise the options

The first few comments here got off on the wrong foot. RSUs aren't options; they're stock grants and are taxable as income at vesting. You'll additionally have to report capital gains/losses when you sell the vested shares.

It is additional compensation, no reason not to accept.

Yep: this is money being offered to you, take it.
posted by We had a deal, Kyle at 10:49 AM on October 12

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