What Are Restricted Stock Units?

One of the exciting aspects of starting a new job is the compensation package offered. Restricted stock units, or RSUs, can be part of a compensation package. RSUs also extend beyond new employees and can be offered to existing employees to reward high performance. Additionally, they can improve overall compensation and share a company’s profits with employees.

How Restricted Stock Units Work

Restricted stock units are a type of company equity or compensation that gives employees shares in a company. They’re usually awarded to employees as part of a compensation package or to reward good performance. When a company does well, employees with RSUs benefit and can earn profit.

Restricted stock units come with conditions that are different for each employer. Common examples include vesting periods and completing a set number of service years. Vesting periods are important to note since RSUs only have value once they’re fully vested. The requirements are usually implemented to encourage employees to stay at the company longer. If employees leave before the vesting period, they forfeit any RSUs that haven’t vested. That said, once RSUs are fully vested, they belong to employees, even if they leave the company.

Types of RSUs

There are two primary types of RSUs-single trigger and couple trigger. Here’s a brief explanation of each.

Single-Trigger RSUs

Also referred to as time-based vesting, single-trigger RSUs are company stocks released on a schedule within a given timeframe. For example, an employee may be awarded 2,000 RSUs, and the vesting schedule maybe 25% after one year of service and equal quarterly installments over the next four years.

To show the numbers in this scenario, the employee may receive 500 shares the first year after receiving the grant. Afterward, the employee would get about 93.75 shares or RSUs every quarter for the next four years. That said, all RSUs can vest at once on a future date instead of overtime if the employer offers what’s called cliff vesting.
Double-Trigger RSUs

With double trigger RSUs, a company may restrict the vesting of RSUs until two requirements are met, hence the ‘double’. Examples of these milestones include completing several service years and then becoming a public company by an IPO. When both requirements are met, the company stock should vest.

RSUs and Taxes

When RSUs vest, it becomes a taxable event since the IRS sees it as compensation. To determine the value of the RSUs, take the number of vested shares and time it by the fair market value of those shares.

RSUs are usually reported on your W2 and are subject to income and payroll taxes. There are two primary ways to pay those taxes. That includes withholding taxes from your paycheck or paying estimated taxes to the IRS. With the initial option, ensuring enough taxes are withheld from your paycheck is essential, or you could end up owing the IRS during tax time. With the latter, you send payments to the IRS quarterly to cover the estimated tax amount you owe for the year. Typically, estimated taxes are paid on April 15, June 15, September 15, and January 15.

In some instances, your company may allow you to reduce your tax liability by letting you use shares to pay your tax bill. For instance, if you need 20% withheld and are awarded 200 shares, your employer may liquidate 40 shares for taxes and give you the remaining 160.

If you sell your RSUs, you may also be liable to capital gains taxes in addition to paying income taxes.

Pros and Cons of RSUs

There are multiple pros and cons of RSUs, and a few are listed below.

Pros 

• Employees receive stock without having to invest any money
• Can create capital to use for other financial goals when RSUs are sold
• Can improve employee retention for employers
• If the company value increases, so do RSUs

Cons 

• Stocks have no value until fully vested
• Tax implications when RSUs vest or are sold
• The future value of RSUs is uncertain. The company may underperform, leaving employees with less value than expected by the time RSUs vest
• Leaving an employer before RSUs fully vest means employees don’t get that awarded income

Since RSUs carry risk, financial professionals advise selling a portion of them periodically to help manage that risk and ensure a diverse portfolio. If you need help managing RSUs and figuring out how they align with your financial goals, contact someone on our team today.