When you receive equity compensation from an employer, it typically requires a comprehensive financial plan — and restricted stock units are no exception.
In 2000, only 20% of public companies granted restricted stock or restricted stock units, primarily for senior executives or higher, according to the National Association of Stock Plan Professionals.
That percentage, however, has jumped to 94%, and most public companies now extend grants to at least middle managers, the organization’s most recent survey from 2021 found.
From a tax perspective, “it’s very similar to a cash bonus,” said certified financial planner Chelsea Ransom-Cooper, chief financial planning officer for Zenith Wealth Partners in New York.
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However, once the shares vest, you’ll have to decide whether to sell or continue holding company stock, she said.
That could hinge on several factors, including your short- and long-term financial goals, how much company stock you already own and how you feel about the company’s growth potential.
How restricted stock units work
Typically, you’re granted RSUs upon hiring, throughout employment or tied to corporate performance.
“That first grant is typically always the biggest,” Ransom-Cooper said. “The additional ones are going to be those golden handcuffs.”
You acquire the actual shares over a set period or “vesting” schedule. Until you own the shares, you won’t receive dividends or have voting rights.
The vesting schedule could be graded, which delivers shares over specific increments. Alternatively, there could be a cliff, such as one year of employment. In either case, you could forfeit unvested shares by leaving the company early.
After RSUs vest, you can sell shares or continue holding them, similar to other investments. Over time, you could amass a sizable concentration of a single stock, which experts say could be risky.
‘Pick a strategy’ for RSUs and taxes
If you’re granted RSUs, you should plan to incur regular income taxes on the market value of shares as they vest. Your company’s tax withholding may not be enough, experts say.
“Companies have a flat withholding rate” of 22% or 37%, explained Bruce Brumberg, editor-in-chief and co-founder of myStockOptions.com, which covers RSUs and other equity compensation.
“You have to be aware of that and pick a strategy,” he said. If your company only withholds 22% and your tax bracket is higher, you may need to make quarterly estimated tax payments.
If you sell your shares, the taxes depend on how long you’ve owned the shares. Your purchase date, or “basis,” is the shares’ market value at vesting.
You could pay long-term capital gains for profitable shares — taxed at 0%, 15% or 20% — if you owned the shares for more than one year. But you’ll owe regular income taxes on short-term gains from shares owned for one year or less.
Whether you’re vesting or selling shares, you’ll need to weigh your complete tax situation — and how the additional income could impact things like college financial aid, eligibility for certain tax breaks and more.
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