- An RSU, or restricted stock unit, is a form of compensation paid in company stock.
- Grant date, vest date and sale date all affect how much money you’ll get from your RSUs and how much in taxes you’ll owe.
- Most companies automatically withhold tax for your RSUs, but it’s not always enough to cover the total taxes you owe.
- Any gain in the stock price between when your RSUs vest and when you sell them, is also taxable.
- If you wouldn’t use a $5,000 cash bonus to invest in your company, you should probably sell your RSUs as soon as they vest.
What if your boss told you they were giving you a bonus—but instead of giving it to you in dollars, they were giving you real, live chickens? Aside from thinking it was really strange, you’d probably be feeling pretty confused on what to do, right?
Getting awarded restricted stock units (RSUs) from your company might feel similar. Even though RSUs can be a lucrative part of many pay structures, they aren’t as cut and dry as a cash bonus, so receiving them can feel foreign and hard to navigate.
However, you’ll soon understand what RSUs are and the different strategies you can use to maximize them while minimizing taxes. Unlike chickens, you don’t have to feel confused about RSUs.
What are RSUs?
Generally speaking, there are three ways your company can compensate you. The first is with dollars through your salary and other bonuses. The second is with company benefits—like health insurance or a gym membership. The third way is by giving you company stock. RSU stands for restricted stock unit, and as you probably guessed, falls into this third category.
When it comes to your restricted stock units, there are three different dates that play into the value of the stock you’ll receive and the taxes you’ll owe.
The first is the grant date. Whenever you are given RSUs from your employer, this is called the grant. Often, companies give RSUs as a sign-on bonus, when you’re promoted or as part of your annual pay structure. Your company will provide you with a grant agreement that details how many RSUs you’re getting and when each unit becomes yours. Even though it sounds like you have company stock at the time you’re granted RSUs, you’re actually only being given the right to receive shares at a future date.
Secondly, the vest date is when an RSU becomes yours and you’re actually issued stock. Vesting is determined by your employer and normally doesn’t happen until at least one year after the grant. When, and how often your RSUs vest is called the vesting schedule. Generally, RSUs will vest over a certain number of months or years. Employers use RSUs and their vesting schedules as a way to keep employees at the company longer. If you quit before your RSUs are vested, you’ll forfeit any unvested RSUs.
Once an RSU has vested, it’s yours, and you now own company stock. From here, you get to decide whether to hold onto or sell your stock. When you sell, the market price on your sale date, will affect how much your RSUs are worth and how much you’ll owe in taxes. Each day, stocks rise and fall with the market. Depending on whether the price is higher or lower than it was when you originally vested determines whether you have a gain or a loss.
How are RSUs taxed?
The great news is that when you receive RSUs, you don’t have to buy anything! Your company is just giving you stock. However, you’ll still owe taxes on this compensation, just like you do your salary.
You are taxed whenever your RSUs vest—even if you decide not to sell your shares. The percentage of tax you’ll owe on your RSUs is your ordinary income tax rate (determined by your annual household income). And, just like your company withholds taxes from your paycheck, they will withhold taxes from your RSUs too. Most of the time, they automatically withhold 22%.
Depending on your income tax rate, this may be enough to pay for all the taxes you’ll owe. However, in 2022, if you are a single tax-filer and make more than $89,075, or you file jointly with your spouse and make more than $178,150, your tax bracket will be higher than 22%—meaning you’ll have to pay taxes on your RSUs at your higher rate. It’s a good idea to check with your Certified Public Accountant or other tax preparer to find out how much extra you’ll owe if you are a high earner to avoid a surprise tax bill in April.
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Assuming you sell your shares as soon as they vest, the taxes we just talked about will have you covered. However, if you decide to hold onto your stock and wait to sell until later, you’ll also be taxed on any gain that happens between when they vest and when you decide to sell them. The tax rate for this additional gain is your ordinary income tax rate if you hold on to them for less than a year, or long-term capital gains rates if you hold them for a year or more after they’ve vested.
How to think about your RSUs
So now that you understand what an RSU is and when they are taxed, let’s explore whether you should sell or hold yours.
Strategy 1: Selling as soon as you vest
If you were to receive a $5,000 cash bonus, would you turn around and invest it in your company? If you said no, you should sell your shares when they vest. This gives you the flexibility to use the sale proceeds however you’d like—whether that be to invest it elsewhere, pay off debt, renovate your house or take a nice trip. Nine times out of ten, this is the strategy I recommend.
Let’s look at some scenarios (1 to 4, below) of how this might work. For these examples, let's say that...
Scenario 1: Jane stays at her company all four years and sells the RSUs as they vest.
You can see how each year, when they vest, Jane sells. She pays taxes on the vested amount and because she sells as they are vesting, she also receives the same amount she is being taxed on.
Now let’s look at what would happen if everything stayed the same, except she didn’t stay with her employer for all four years:
Scenario 2: Jane leaves her company after two years and sells the RSUs as they vest.
Here you can see that Jane missed out on $101,000 by choosing to leave her job.
In both examples, you can see that when you sell as you vest, you’re guaranteed to receive the actual amount you paid taxes on. There is no risk of the stock price going down when you’ve already paid taxes on it at a higher amount.
Strategy 2: Holding the stock after it vests and selling later
This option is the riskier of the two. Most of the time, I don’t think the reward is worth the risk. However, if you would invest the hypothetical $5,000 cash bonus into your company, or you really believe your company is going to grow and want to bet on its success, this may be a good option for you.
Take note, however, that utilizing this strategy involves trying to predict and time the market for your company’s stock. Additionally, you’ll have less flexibility than strategy one because your money is tied up until you sell. (It’s also likely that your company will be restricted by the Securities Exchange Commission to specific trading windows during which you can sell company stock—you won’t necessarily be able to drop your RSUs at a moment’s notice.)
Here are some examples of how this might work using the same example with Jane.
Scenario 3: She stays at her company all four years, but holds and sells after vesting (and the stock price declines).
Looking at years one and two, you can see how Jane paid taxes on $108,000 during year one, but when she sold those 1,000 shares later in year two, she only received $70,000—incurring a $38,000 loss. Unfortunately, no one is able to predict what stock prices will do day to day. This is the risk of this strategy.
Now, let’s see what would happen if the stock price happens to go up.
Scenario 4: Jane stays at her company all four years, but holds and sells after vesting (and stock prices go up).
Looking at year four, you can see that Jane made an additional $95,000 because she was lucky and stock prices rose. However, this scenario is just as likely as example three. This is why I don’t typically recommend this strategy.
The unpredictable nature of stock prices day-to-day creates a high-risk, high-return situation. Additionally, emotions can sway a person to buy or sell even when it may not be the best time to do so. Keep this gamble in mind if you decide to go this route.