What Are RSUs, and How Can You Use Them?
Understanding this unique form of receiving company stock can help you plan your future with a new employer.
June 10, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Consult with a professional financial or investment advisor before making investment decisions.
In today’s competitive job market, there’s more to consider from a potential employer than salary alone. The compensation package can also play a big role in deciding if an employer will be worth your time and energy.
A potential form of employee compensation that a company might offer are RSUs, or restricted stock units. This unique form of stock-based compensation may provide a significant boost to your ordinary income.
So, what are RSUs? We’ll cover that and more below. By understanding what they mean for your financial future, you can accept a job offer with confidence.
What are RSUs?
RSUs are one of a few employee stock options that an employer might offer as part of your compensation. These stock options are offered by public companies that are traded on the stock market. However, there are some situations where private companies will offer RSUs to their employees before an IPO (initial public offering).
Restricted stock units essentially act as a promise from the employer that the employee will receive a set number of shares at a future vesting date.
For example, the agreement might be that you will receive 4,000 shares of company stock over a four-year vesting period. Typically, under this type of vesting schedule, you would actually receive 1,000 shares at the end of your first year with the company. Then, you would receive an additional 1,000 shares at the end of your second year and so on.
You don’t have to invest any of your own money to receive these shares at their fair market value. So, if your company’s shares are worth $10 at the end of your first year and you receive 1,000 shares, you would essentially receive $10,000 worth of company stock. As such, vested RSUs act as a potentially huge bonus to your standard income.
Companies typically view RSUs as an investment in the employee. By tying vestment dates to your time with the company or reaching certain performance milestones, they ensure you’ll stick with them for the long haul and give it all you’ve got. As the company’s value increases, so will the value of your RSUs when they vest.
However, if you quit or get fired before you receive all the RSUs that were granted to you, you won't be given any additional shares. You will still own the shares you were vested while you were with the company.
It’s worth noting that RSUs are different from “stock options.” This is when an employer gives you the opportunity to buy company shares at a set price. With RSUs, you don’t pay anything to the company; you receive the shares automatically based on the vesting schedule.
Can you negotiate for RSUs?
Asking for RSUs can be a valuable strategy for negotiating compensation with your employer. A good time to express interest in this form of compensation is when you’re taking a new job or getting a promotion. Asking for RSUs can demonstrate your personal commitment to the company, since shares vest after a set timeframe.
Even if your company doesn’t offer a stock purchase plan for employees, it doesn’t hurt to ask if you can receive RSUs as part of a promotion or new role. Gaining equity in the company is a great way to increase the long-term value of your compensation.
How to take advantage of RSUs
When your RSU shares vest, it’s not the same as receiving cash. The value of the shares is directly tied to your company’s stock price. As noted earlier, if you have 1,000 shares at a value of $10 each, your vested shares are initially worth $10,000. You could sell those stocks to “cash out,” putting the money directly into your bank account. Or, you could maintain the investment.
If the stock price goes up, so will the value of your vested shares. Of course, if the company’s stock value goes down, your portfolio will also lose value. When RSUs are vested over a period of several years, it isn’t unusual for the value to vary from year to year. While the share value may have been $10 in year one, it could be $8 in year two, $15 in year three and $23 in year four.
Deciding whether to buy or sell your stock after it has vested can depend on several factors. In some cases, you might need the extra money immediately to help pay off credit card debt. Or, you might want to wait for the stock to increase in value so you can save toward a big financial goal, like buying a house.
Either way, financial planners generally recommend diversification of your stock portfolio. Investing in several different stocks, rather than keeping all your money in your company’s stock, may mitigate extreme ups and downs in your stock value. You won’t be putting all your eggs into one basket. You could reduce your portfolio’s risk by selling some of your company stock to invest in other stocks or mutual funds.
How do RSUs affect your taxes?
While RSUs can add a substantial “bonus” to your bank account, you don’t want them to land you in trouble with the IRS. You do have to pay taxes when your shares vest. The IRS considers RSUs to be equity-based compensation and taxes them as income in the year you receive them.
So, if you earned $60,000 in salary and received $10,000 worth of vested shares in 2022, your income tax liability would be the same as if you had a salary of $70,000. While adding to your tax liability isn’t fun, the value of your shares is generally going to be greater than the amount you’ll be taxed for your equity compensation.
If needed, you could even sell shares to pay your higher tax bill. However, your employer will often help you manage this by having you “surrender” (or sell back) some of your vested shares to the company to cover your income tax withholdings.
Because this practice can vary from company to company, it's wise to review your company’s RSU policies and possibly consult with a financial advisor to understand how an employer’s method for addressing RSUs and taxes could affect your tax rate.
When you decide to sell your vested shares, you will also be responsible for paying capital gains taxes. This tax is only applied when you sell your shares and is based on how much money they appreciated (or increased in value) from when you first received them.
For example, if you received $10,000 worth of shares from your company and sell them when they are valued at $15,000, the capital gains you would be taxed for would be $5,000 ($15,000 minus the initial $10,000 investment).
If you hold your shares for more than a year, they will be taxed at the lower long-term capital gains rate, which is either 0%, 15% or 20%, as of 2022. Selling stocks less than a year after the initial investment means they will be taxed at the same rate as regular income.
If the value of your company’s shares go down before you sell them, you can instead write it off as a loss (which can be used to offset other capital gains or lower your income tax liability).
Planning ahead for RSUs
You may have been wondering, “What are RSUs?”
Understanding what they are if a potential employer offers them is a valuable first step. Receiving shares of company stock can provide a boost to your net worth, particularly if the value of the stock goes up.
Depending on your situation, you may choose to sell or hold your stocks. Selling your shares can provide much-needed money to pay off debts, while continuing to invest could help you reach other financial goals down the road.
You also want to understand how RSUs will affect your tax bill when the shares vest. By carefully reviewing your company’s RSU agreement and consulting with a financial planning professional, you can have confidence while navigating this unique form of compensation.
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