If you manage to land a C-Suite position or perhaps you’re a very valuable technical expert, your compensation package might include Restricted Stock Units (RSU). They’re a great benefit, but they’re not simple. So, let’s take a look.
What Are They?
RSU’s are a type of non-qualified plan. This means that an employer can offer them to just the employees he or she wants to. Specifically, RSUs are the promise to transfer company stock to the employee at some future date.
Typically, an RSU will have a vesting schedule where a certain percent of the grant becomes vested (yours) over a period of 5 years or so. Leave the company before the 5-year period? Leave some stock behind.
That’s it, basically. Pretty simple. They are, but the taxes aren’t exactly
Tax Ramifications of RSU’s
Since the RSU’s have a “substantial risk of forfeiture”, when they are granted, they are not included in your taxable income when granted. The deferral of income recognition is common in non-qualified plans.
However, when they do vest the fair market value of the stock received is included in income and is considered compensation. This means it is subject to income and Social Security and Medicare taxes. Often, Social Security taxes won’t matter as employees that are offered RSU’s usually are above the Social Security Wage base. But they could be subject to the additional ObamaCare surtaxes.
You can decide to hold the stock after it vests. Just make sure you are aware of the risks in owning a single stock and of having too much employer stock in your portfolio. Many times, it makes sense to sell the shares shortly after vesting.
When you sell the stock, any gain after vesting is a capital gain subject to capital gains tax. To get long-term capital gains treatment, you’ll need to hold the stock for a year. And remember, the basis of the stock is the value on the vesting date.
One of These Things is Not Like the Others
There are also non-qualified plans that include restricted stock. These are not the same thing as an RSU. The major thing you need to be aware of when it comes to the differences is that RSU’s can’t take the 83(b) election. You can read about restricted stock plans here.
This stuff isn’t easy and it takes time. If you’d like some help, give us a call.
If you liked this article, you might enjoy the following blog posts:
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.