Exploring the Implications of Restricted Stock Units

Exploring the implications of Restricted Stock Units on #taxes #compensation #wealthmanagement #SignatureWMG

In the corporate world, there are a lot of unique compensation packages that include more than just the standard salary, insurance, paid leave, and 401(k) and/or pension.  These packages present their own unique challenges for employees to properly manage their benefits. Improper planning can lead to unnecessary tax events, a mismatch in retirement needs to asset levels, or general confusion about the salary packages and the benefits they provide.

One of the more confusing packages available to employees is the restricted stock unit (RSU). With this form of compensation, the employee is granted a stock to a publicly traded company that cannot be traded until the vestment date. Without proper management, the employee could burden themselves with unnecessary taxes and fall short of retirement goals.  Some corporations like to use RSU’s as a way to supplement compensation without paying cash. These corporations tend to have a salary cap but can boost total salary above the cap through the RSU’s.  For instance, an employee that would otherwise make $265,000 a year makes $165,000 in cash salary and $100,000 a year in restricted stock that can be sold during certain windows throughout the year, redeemed in cash.

But there are additional tax implications with restricted stock. For one thing, the RSU’s are a part of the employee’s income which makes it subject to income tax.  The income is calculated at the time of vestment and the share price is locked in at that time. To pay the income tax, part of the RSU is withheld before the shares are granted. As an example, an employee with a $100,000 RSU bonus receiving 100 shares of XYZ stock ($1,000 per share) might only receive 80 shares at the time of vestment with the remaining 20 shares paying the income tax. Usually, the corporation will do this automatically for the employee.  The employee is then free to do what they desire with the remaining 80 or so shares.

However, the tax hurdles are not yet cleared. Once those shares are sold, the employee is also subject to a capital gains tax rate.  Should the employee immediately sell the 80 shares, then the capital gains taxes should be minimal because there simply isn’t enough time to generate capital gains. However, If the employee sells the shares within the first year after gains have been accumulated, then the shares are subject to a short-term capital gain tax rate.  The rate is essentially your income tax rate. If the employee is in the 35% tax bracket, taxes must be paid on the difference between the price of the stock when the shares sell and when they were vested.  For example, if the shares sold at a 3% increase (that’s a $30 profit on XYZ shares), then approximately $10.50 in taxes would be due per share sold.  Ultimately, a tax professional should be consulted on this.

If the shares are sold a year later or more, then they’re subject to the long-term capital gain tax rate. For most people, that rate will be 15% (again, consult a tax professional). See the table below for single filers: