Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) have grown in popularity as a compensation tool for many companies, especially tech giants in Silicon Valley. They offer employees a stake in the company's future without actually giving them stock right away. Instead, they promise to give stock (or cash equivalent) at a future date, typically contingent on specific conditions like staying with the company for a certain duration or meeting performance goals. Here's what you need to know about the tax treatment of RSUs.

How RSUs Work:

1. Grant: The company provides RSUs to an employee as part of their compensation package.
2. Vesting: After a set period or upon achieving certain conditions, the RSUs "vest", meaning they're converted to actual stock or cash equivalent.
3. Delivery: Once vested, the company delivers the stock or its equivalent value in cash to the employee.

Tax Implications of RSUs:

1. At Vesting: The most significant tax event for RSUs is when they vest. At this time, the RSUs are considered taxable income. The value of the RSUs on the vesting date (equal to the fair market value of the stock) is treated as ordinary income. This amount will be subject to all applicable income taxes (federal, state, and local) as well as FICA and Medicare taxes.

2. At Sale: When the stock received from RSUs is sold, there's another tax event. If the stock is sold for more than its value on the vesting date, that profit is considered a capital gain. If it's been held for over a year, it's a long-term capital gain, otherwise, it's a short-term capital gain.

Withholding and Reporting:

• Withholding: Companies typically handle the tax due on RSUs by withholding a portion of the vested units to cover the tax liability – a process referred to as "share withholding". For instance, if you're set to receive 100 shares from RSUs and the tax obligation is equivalent to 25 shares, you'll receive 75 shares with the company selling the 25 to cover the tax.
• Reporting: The income from RSUs will be reported on your Form W-2, making it relatively straightforward to report when filing your taxes.

Considerations for RSU Holders:

1. Tax Planning: It's essential to understand the potential tax bill upon vesting to avoid any surprises. Planning can include setting aside money to cover any additional tax liability not covered by share withholding.

2. Selling Strategy: Consider your overall investment portfolio when deciding when to sell stock received from RSUs. While some may opt to diversify immediately, others might hold onto the stock, betting on its future appreciation.

3. Financial Goals: Align the strategy for your RSUs with your broader financial goals, whether it's saving for a down payment, retirement, or other financial milestones.

RSUs provide employees a way to participate in the growth and success of the company. While they come with significant tax considerations, with the right planning, they can be a lucrative part of an employee's compensation package. As always, consider consulting with a tax professional or financial advisor to make informed decisions about your RSUs.