If you’ve been granted Restricted Stock Units (RSUs), think of them as a kind of corporate IOU. Your company is saying: “If you stick around and meet certain conditions, we’ll give you stock.” RSUs are one of the most common forms of equity compensation in private and public companies alike, and they can be a powerful way to build wealth – if you understand how they work and what they mean for your taxes.
What Exactly Are RSUs?
RSUs are promises to deliver company stock (or the cash equivalent) in the future. Unlike stock options, you don’t get the right to buy shares at a set price. Instead, when your RSUs vest, you automatically receive shares.
Key things to know:
- No purchase required: You don’t pay anything to get your RSUs.
- Tied to vesting: You only get the shares if you stay with the company long enough or hit performance milestones.
- Real ownership comes later: Until they vest, RSUs are just a promise.
Taxes on RSUs: The Big Picture
Here’s where RSUs feel a lot more like regular income:
- At vesting: The value of your RSUs on the vesting date is taxed as ordinary income. Your company will usually report this on your W-2.
- Payroll taxes apply too: Just like with your salary, Social Security and Medicare taxes could be withheld.
- Cost basis: The fair market value (FMV) of the shares on vesting day becomes your cost basis – the starting number for calculating gains or losses later.
Selling Your RSUs
After vesting, you own actual company stock. From here, you can hold or sell:
- If you sell right away: There’s usually little to no capital gain, since the sale price will likely be close to the FMV at vesting.
- If you hold: Any future appreciation is taxed as capital gains when you sell. Hold more than one year, and you’ll qualify for long-term capital gains rates (likely lower than ordinary income).
Example
Say you vest 1,000 RSUs when the stock price is $20:
- You recognize $20,000 in ordinary income, which will show up on your W-2.
- Your cost basis is $20 per share.
- If you later sell the stock at $30, you’ll owe capital gains tax on the $10,000 profit.
Key Considerations
- Taxes can create a cash crunch. Even if you don’t sell your RSUs at vest, you still owe tax on them. Some companies help by withholding shares to cover the bill, but you may need to plan ahead.
- Diversification matters. Since your income and wealth may already be tied to your company, think carefully before holding onto large amounts of vested stock.
- Timing can make a big difference. Selling right away locks in certainty, while holding exposes you to both upside and downside risk.
RSUs are valuable, but they come with strings — and taxes. Think of them less as a free gift and more like a paycheck in stock form. To make the most of them, consider your tax situation, financial goals, and risk tolerance. And when in doubt, consult a financial advisor who understands equity compensation.
