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Restricted Stock Units

April 08, 2024

Restricted Stock Units

Understanding How Stock-Based Grants Work

by Blake C. Knoefel

 

Restricted Stock Units (RSUs) are financial products that many find confusing and even a bit intimidating. Understanding their tax implications, vesting schedule structure, and selling requirements enables people to make informed decisions regarding this equity compensation tool.

 

RSUs Defined

An RSU is a form of equity compensation made by an employer to an employee. It is a company’s promise to give shares of its stock to an employee according to a stated schedule or when certain criteria are met. When vesting conditions are achieved, the recipient then can hold the stock or sell it back. However, companies often have blackout periods and trading windows restricting when selling can occur. Knowing these specific time frames and restrictions is critical to an individual’s tax strategy and access to funds.

 

Tax Implications of RSUs

When vesting conditions are met, common stock is transferred to the employee and is taxed as ordinary income in that year. Often, companies will withhold a portion of stock to cover the tax cost (twenty-two percent, in many cases). For some individuals this amount may not cover their tax liability, resulting in taxes owed. If stock is held, the recommended time frame is at least a year so that income from the sale is taxed as long-term gains rather than at the higher rate of short-term gains.

 

Summary

Knowing about RSUs should be no substitute for professional advice. These are financial instruments with timing and restriction consequences that make them inherently complex. Speaking with a financial advisor about one’s unique economic situation should ease any uncertainties.