For example, shares become vested over time, which reduces the number of non-exercisable shares (that the company can repurchase). In most cases, the employee retains a certain number of shares, depending on the duration of employment and the provisions of the acquisition plan. If you live in a high-tax state, your RSU income can be taxed up to 50%. In addition to federal income tax, RSU income may also be subject to state and local income tax. The amount of income is equal to the difference between the value of the shares at the time of the allocation of restricted shares and the amount, if any, you pay for them. If you work for a company that has just gone public, you may also be subject to what is known as a “lock-up period.” It usually takes 90 to 180 days from the date of the IPO. In other words, even if your RSUs are fully vested on IPO day, you can`t sell them until your lock-up period ends in a few months. Imagine receiving 60,000 dual-trigger RSUs in a pre-IPO company (February 15 of “Year 0”). If 25% of the subsidy is vested after one year, the 15,000 RSUs acquired do not yet count as income, even if you now own 15,000 shares.
These 15,000 shares are illiquid because the company is not yet listed. RSAs are usually involved when a person is an early employee. As a general rule, RSAs are granted before each equity financing cycle. Startups typically don`t have a lot of financial leeway to attract top talent, and by adding RSAs, they can be competitive in the hiring market, provided there is a high risk factor and high reward for the employee. In most cases, these RSAs are offered at fair market value (FMV), at a discounted FMV, or sometimes even for free. Sell the shares as soon as the RSUs are acquired if you do not use a corresponding cash bonus to buy shares of the company. RSUs are a bonus payment that happens to be in stock and not cash. If you received a cash bonus and didn`t use the money to buy shares of the company, turn the bonus into cash shares by selling the shares immediately. If you have short-term goals like buying a home, sell the shares to fund a down payment. While our first three strategies today were to reduce your tax bill, our latest planning strategy explores a way to hedge your RSU position and delay the sale – either because you need to hold a position in your company`s stock or to defer the tax bill to a potentially more favorable year. RSUs are like options with a strike price of $0.
An RSU share therefore always has at least as much value as a stock option. However, for this reason, companies typically grant more option shares than UARs. A rule of thumb for technology professionals is that four options are roughly equivalent to an RSU action. RSUs are used at more mature stages of a business. Given that the company is worth more than it was when it launched, offering RSAs wouldn`t make sense or be possible. RSAs belong to the employee at the time of grant; RSUs follow the principle that shares will be delivered at a later date, depending on the exercise schedule, a specific date or a liquidation event. RSUs are also granted free of charge to the employee, unlike RSAs which must be “purchased”. From stocks and crypto to rental income, TurboTax Premier has you covered. 4.
Tax withholdingJust like your regular salary, your employer withholds taxes from your RSUs. Social security and health insurance taxes are generally withheld during the exercise. Income tax is withheld on delivery. Many companies automatically sell their shares to cover withholding tax without giving you a choice. Some companies may offer you different ways to pay source deductions, including, but not limited to, payment by personal cheque or direct deduction from your paycheque. It helps to choose the best retention method based on your specific situation. But more importantly, you need to know how much tax your business withholds for you, especially income taxes. Therefore, the shares cannot be delivered until the conditions for acquisition and expiry are met and the release is granted. Some RSU plans allow the employee to decide exactly when they want to receive the shares within certain limits, which can be useful in tax planning.
However, unlike standard restricted shareholders, RSU participants do not have voting rights on the shares during the vesting period because no shares were actually issued. The rules of each plan determine whether RSU holders receive dividend equivalents. RSAs are held at the time of grant, but the actual exchange of value will only take place in accordance with the exercise plan. It is only if shares are acquired that the employee is subject to tax. This means that profits from the FMV earned between the grant and exercise dates are not applicable. You may have a capital gain from your RSU. Let`s say you sell the shares at a price higher than their fair market value (i.e., the amount they are worth on the open market). If the transaction resulting from this profit occurs within one year of the date of acquisition of the RSU shares, the profit will be defined as current by the Internal Revenue Service. Short-term capital gains are taxed at regular tax rates. If the transaction takes place more than one year after the acquisition date, long-term capital gains taxes will apply (they are currently 30%). In general, the value of your RSU shares reflects the market value of your employer`s shares.
This is an important consideration for your financial future and also why you want to talk to a financial professional (and perhaps a tax professional) after your company has granted you limited shares. Ultimately, RSU plans, like other types of stock-based compensation, are very company-specific. Each plan may have specifics or provisions that are unique to others and are not covered in this article. I recommend that you read your plan agreement carefully, direct your questions to your human resources department or even consult external professionals if necessary to make informed financial decisions and avoid unintended consequences. This also means that the RMUs acquired are not associated with voting rights or dividend distributions. Certain UAR arrangements may include equivalent dividend distribution options for non-exercisable shares. Key point: To be clear, blocked shares are transferred to you, but you do not own them without restrictions until they become vested. In order to ensure that the non-transferability requirement is met, restricted shares are generally accompanied by a legend disclosing the restriction(s) imposed on them and/or indicating that they are not transferable. If you resign or are fired, you lose acquired RSUs. Consider coordinating your release date with your next RSU acquisition date.
For example, if your next RSU is on November 15, cancel on November 16. In most cases, these types of shares are offered as restricted share awards (RSAs) or restricted share units (RSUs). The restricted element means that these shares follow an acquisition schedule, a system in which shares are earned over time. Generally, you can consider acquired shares if the employee “fully owns” them and acquired if they are “wholly owned” at a later date. There are significant differences between RSAs and RSUs, which also affect how taxes should be paid on both. Non-transferable: This condition is met if, if you transfer the restricted shares to another party, the new holder`s rights to the shares are still subject to the same significant risk of forfeiture. For example, the shares meet the non-transferability requirement if you can sell the shares, but the new owner must lose them to your employer if you do not provide the required services by leaving the business too early. In the scenario below, we use Intel stock from February 2020 to show this strategy of selling $70 calls that expire in January 2021.
This brings a premium of ~7%, but limits your maximum profit to the position to 13% – at a price of $70 per share or more. However, as you can see, the downside is essentially limitless, except for the 7% premium generated. If you need help integrating your restricted stock units into your overall financial plan, schedule a free consultation. 6. Dividend RSUs generally do not have voting or dividend rights as they are not actual shares until exercised or delivered. This is also one of the differences between SSRs and restricted stocks. However, some corporations may pay or accumulate dividend equivalents on RSUs if they pay dividends on outstanding shares. Accrued dividend equivalents are generally paid to RSU holders in cash or additional shares. Another thing to mention here is that if you get 1099-DIV for these dividend equivalents, check if they are already included in your W-2. You don`t want to count the same income twice when you file your taxes. Medical expense deductions starting in 2020 are limited to “total eligible out-of-pocket medical expenses in excess of 10% of your adjusted gross income.” If you have a year with high medical expenses that push you above the 10% threshold, it is possible to pay all pending costs in advance and draw as much deduction as possible in the current year. You must record your taxable income in the year you receive the restricted share allotment, although the restricted shares may expire later or lose value.
If you have to lose the shares to your employer, you can claim a loss of capital on the amount you paid for the shares, if any. However, you don`t get respite for taxable income you reported and paid taxes because you made the election 83(b). You can sell acquired RSUs.
