There are various types of equity/stock compensation employees can receive from their employer. Some employers offer incentive stock options (ISOs), restricted stock units (RSUs), performance shares, or employee stock purchase plans (ESPP). Each type of employee stock compensation aims to align the interests of employees with those of the company to promote employees’ long-term commitment and loyalty to the company.
This post will focus on restricted stock units (RSUs).
An RSU is a commitment by your employer to provide you with shares of company stock at a later date. When your company grants you the shares, they present you with a vesting schedule that shows when the vesting period is over. Prior to vesting, which usually lasts several years, your control of the stock is restricted and you cannot sell it. These restricted shares are not yours and you lose out on them if you leave your employer.
Once fully vested, the RSUs are now yours, meaning you have the ability to sell (or keep) the shares. One way to think about whether to sell or keep your vested shares is to view them as a cash bonus. Would you use the hypothetical cash bonus to buy shares of the company you work for? In our experience, the answer is probably no.
It is important to remember that once the RSUs vest, they will be treated as compensation and be taxed as ordinary income. If you decide to keep after vesting, your shares are now subject to capital gains tax.
Employers usually withhold 22% for RSU’s, which may not be enough if you’re a high income earner. Consult your tax advisor here.
Understanding how RSUs function and the timing of it's taxes can help you gain clarity on planning for other areas of your life such as buying a home, putting a child through college, or retirement savings.