For many, company equity is a significant portion of compensation. For publicly traded companies, restricted stock units (RSUs) are often the most common type of equity compensation.
Here is what you need to know about your equity award compensation.
1.Restricted Stock vs. Restricted Stock Units
Although similar, there are significant differences between restricted stock and restricted stock units. Restricted stock (also called letter stock or section 1244 stock) is usually awarded to directors or other c-suite executives. Restricted stock comes with more conditions and restrictions than RSUs.
2. Vesting Schedule
RSUs do not belong to you until vested. If you leave your company before your vesting date you forfeit the unvested portion of your RSUs. In general RSUs become vested in two ways. One, your vesting falls under a “cliff” schedule (100% of your RSUs will vest on a set date). Or your RSUs fall under a “graded” schedule (your RSUs will vest gradually over time, e.g., 25% of your granted amount will vest every year over a four-year period).
If you work for a private company, there typically needs to be a “double-trigger” RSU event to receive vested shares in your company stock. The first trigger is often a time-based schedule that sets out how employees “earn” their shares over a specific period. The second trigger is an exit, typically an IPO or sale to another company.
3. Delivery Date
RSUs will be taxed upon delivery – not at granting or vesting. Under most RSU plans, the shares are delivered to you at vesting. However, some plans give you a choice to defer the share delivery to a future date giving you flexibility to determine when you pay taxes on your vested shares based on your situation.
4. Tax Implications
RSUs are treated as supplemental income. This means many companies withhold federal income taxes at a flat rate of 22% (37% for amounts over $1 million). The 22% doesn’t include state income, Social Security, and Medicare tax withholding. Many companies will automatically sell your shares to cover the tax withholding. It is very important to know how much your company is withholding for you. IF YOUR MARGINAL FEDERAL INCOME TAX BRACKET IS HIGHER THAN 22% YOU ARE LIKELY NOT WITHOLDING ENOUGH. To avoid a surprise tax payment at the end of the year you can increase your withholding amount from each paycheck by adjusting your W-4 or you can make quarterly estimated tax payments to the IRS.
5. Trading Restrictions
To prevent insider trading, you may be subject to certain trading restrictions. The most common restriction is a blackout period and specified trading window. The blackout period is a period (typically preceding earnings announcements) where you cannot transact in your company’s stock. The trading window is the period of time when you are permitted to trade your company’s stock.
If your company just went public, you may be subject to something called a “lock-up period”. It usually lasts 90-180 days from the IPO date. This means even if your RSUs become vested, you will likely need to wait until you can sell any stock.
RSUs do not have voting and dividend rights because they are not actual shares in a company’s stock until they are vested or delivered. However, some companies will accrue dividend equivalents on RSUs when paying dividends on actual outstanding shares of stock. These accrued dividends will usually be paid to RSU holders at vesting in cash or additional shares. Be sure to cross-reference your 1099-DIV tax form with your W-2 to make sure accrued dividends are not double counted.
7. Beneficiary designations
Just like your 401(k), naming a beneficiary is an easy way to avoid a long and costly probate process. If your company does not allow for your RSU plan to designate beneficiaries, you can contact an attorney to specify your wishes in your drafted estate plan.
The Clifford Group, LLC (“The Clifford Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where The Clifford Group and its representatives are properly licensed or exempt from licensure. This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. Please see our Disclosures page for further information.