what is restricted stock unit

• A restricted stock unit (RSU) is stock-based compensation issued by an employer.
• A vesting period exists before the RSU converts to actual common stock. Until then, it has no monetary worth.
• Once the RSU converts to stock, the stockholder may pay taxes on its value.
• RSUs are better than stock options. ...

Full Answer

What is restricted stock and how is it taxed?

 · A Restricted Stock Unit (RSU) refers to a grant of a value equal to an amount of a company’s common stock. The RSU is typically granted to a new or valuable employee as an incentive for employment or to meet specified performance goals.

What to do when your restricted stock units vest?

 · A restricted stock unit (RSU) is a form of stock-based compensation used to reward employees. Restricted stock units will vest at some point in the future and, unlike stock options, will have some...

How are restricted stock units taxed?

 · A restricted stock unit is a type of compensation issued by an employer in the form of company stock. It is a promise of future stock in the company and not technically worth anything immediately. The RSU is converted to actual stock shares once the employee is fully vested through performance or length of time with the company.

Are restricted stock units taxed?

A Restricted Stock Unit is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit.

Are restricted stock units good?

Restricted stock units (RSUs) are a way your employer can grant you company shares. RSUs are nearly always worth something, even if the stock price drops dramatically. RSUs must vest before you can receive the underlying shares. Job termination usually stops vesting.

Is it better to take RSU or stock options?

Stock options are only valuable if the market value of the stock is higher than the grant price at some point in the vesting period. Otherwise, you're paying more for the shares than you could in theory sell them for. RSUs, meanwhile, are pure gain, as you don't have to pay for them.

Should I accept restricted stock units?

RSUs are appealing because if the company performs well and the share price takes off, employees can receive a significant financial benefit. This can motivate employees to take ownership. Since employees need to satisfy vesting requirements, RSUs encourage them to stay for the long term and can improve retention.

Why do companies give restricted stock units?

RSUs provide an incentive for employees to stay with a company for the long term and help it perform well so that their shares increase in value.

What happens to RSU if you leave?

Whenever you decide to quit, the vested portion of your RSUs will stay yours. Since shares of company stock are released to you upon a vesting date, those RSUs become shares that you own outright. And since you now own company shares outright, your departure from the company has no effect on your ownership.

Should I cash out my RSU?

Usually, it is recommended to sell the RSU immediately after the vesting period is complete to avoid any additional taxes. Insiders and employees that hold the RSU, need a RSU selling strategy. But for investors with a different and more diverse portfolio, holding on to the RSU is the choice to make.

Do you get more RSU after 4 years?

Restricted Stock Units (RSUs): Stock vests will begin on your first anniversary. You will receive additional stock vests at the end of year 2 and then every 6 months until you've been with the company for 4 years. Many Amazon employees receive additional refresher RSUs as an Amazon employee over time.

Why are RSU taxed so high?

Since RSUs amount to a form of compensation, they become part of your taxable income, and because RSU income is considered supplemental income, the withholding rate can vary from 22% to 37%.

Do you keep RSU if fired?

In the event your employment is terminated by reason of involuntary layoff, disability, or death, your RSU payout, including any Earnings Credit RSUs, will vest after termination of employment.

Can you sell restricted stock?

Restricted stock refers to unregistered shares issued by public companies in private placement transactions and also to registered and unregistered securities held by affiliates and issuers. Restricted stock cannot be sold through public transactions due to securities laws and regulations.

Do you pay taxes on RSU twice?

You would be paying tax twice on the income from receiving RSU shares—and that's paying tax on an extra $10,000 of gain! One additional note to be aware of: The tax you pay on the sale of your shares follows the normal rules for gains and losses on investments.

What is the difference between an RSU and a PSU?

PSUs are simply RSUs with a slightly different vesting trigger. Instead of the simple passage of time associated with RSUs - stay with the company until the vesting date - PSUs depend on staying with the company until some goal or event is achieved.

What is restricted stock unit?

A Restricted Stock Unit ( RSU) refers to a grant of a value equal to an amount of a company’s common stock. It is typically given to employees for employment.7 min read

What is an RSU?

An RSU is only one of many types of compensation that a company might use as an employee incentive. Some companies may elect to use RSUs, while others may choose stock grants or another form of equity compensation. It is up to you to decide which form is best for your company and your employees.

What is stock grant?

Stock grants refer to the issuance of an award, such as a stock option, that is provided to key employees as part of a stock plan. Stock grants allow the employee to purchase a specific number of shares of company stock at a specific price (known as the grant price) as stated in the grant. Restricted stock awarded to employees is a form ...

What is phantom stock?

Phantom stock is often used as a way to compensate certain individuals with a form of equity participation in a startup in lieu of stock options . For example, the “owner” of phantom shares may receive a predetermined amount of money when the company issuing the phantom shares goes public.

How long does a RSU vest?

The value of the stock may not be as great as anticipated. RSUs typically do not fully vest for five years, meaning that if you leave the company before that time, you will lose your ability to claim some or all of the stock shares under your RSU plan.

What happens when you vested in stock?

Once vested, you own the stock shares at their current market value.

What are the disadvantages of using RSUs?

They include: Your stock may not increase in value sufficiently to reward employees. RSUs are not always a sufficient incentive to attract the right talent.

What is restricted stock unit?

Restricted stock units (RSU) are a form of stock-based compensation used to reward employees. RSUs will vest at some point in the future and, unlike stock options, will have some value upon vesting unless the underlying company stock becomes worthless. RSUs can be an important part of your client’s compensation package.

What does it mean to hold shares upon vesting?

Another way to look at this: A decision to hold the shares upon vesting is a decision to buy a company’s stock at the price on that day. If the shares have greatly appreciated, this is like buying at the top of the market and hoping that the shares continue to appreciate.

Why are RSUs important?

RSUs can be an important component of a client’s overall compensation package. A financial advisor can provide much-needed advice as to how to best handle what is essentially a bonus payment.

How much of your portfolio should be in company stock?

There are no hard and fast rules about allocation, but many financial advisors caution against holding more than 10% of your portfolio in company stock. Any concentrated stock holding is risky, but when it’s your own company’s stock, you run an elevated risk if the company falls on hard times.

Should a client take stock in taxable accounts?

The client should take into account all other shares of company stock held in taxable and retirement accounts. If the employer’s stock is a steady performer, the employee may be tempted to hold the stock—after all, there was no cost to obtain the shares.

Do restricted stock units have to be taxed?

They are subject to taxation at ordinary income rates plus the applicable state income tax rate. (For related reading, see " How Restricted Stock and Restricted Stock Units (RSUs) are Taxed ")

Do you have voting rights on RSUs?

Holders have no voting rights nor do they receive any dividends paid while they hold the RSUs. Some companies will pay dividend equivalents on the RSUs. Companies can let dividends accrue and use these funds to cover some of the taxes due at vesting.

How many RSUs are converted into stock?

For example, a new employee receives 400 RSUs with a vesting schedule of 100 RSUs every year. That means that on their first anniversary, 100 of their RSUs are converted into company stock. By their fourth anniversary, all 400 of the employee's RSUs are now actually company stock.

What is an RSU?

An RSU is a restricted stock unit, which is a type of stock-based compensation that some employers offer. When an employee receives RSUs as a part of their compensation package or as a bonus, they are a future promise of stock in the company and are not technically worth anything immediately. The RSUs only become worth something when the employee becomes fully vested. When an employee becomes vested, it means that the RSUs are converted to actual stock in the company.

What does it mean to have RSUs?

When you have RSUs, you have the potential to own part of the company in the future. Since you also work for the company, you can have a direct impact on the value of the stock based on your work performance. You may be more motivated to work harder to achieve company objectives and increase your stock value.

Can you negotiate RSUs?

Since RSUs are often a part of a compensation package, it may be possible to negotiate what you receive and when as part of your job offer. For example, you may be able to ask for more RSUs or a shorter vesting period to get actual stock more quickly. Employers may be more likely to accept your negotiations since RSUs don't cost them anything upfront.

Can you sell RSUs?

RSUs are a flexible and low-risk benefit that you can use as you see fit. Once you're vested and your RSUs become actual stock, you can sell that stock or hold it for as long as you like. Since you own the stock, you can hold on to it even if you decide to leave that job.

What are the disadvantages of RSUs?

Disadvantages of RSUs. Since RSUs are a promise of stock, they don't have any actual value when you first receive them. RSUs do not pay dividends, which are regular payments that companies make to stockholders, and the only change in value is based on how your employer's stock is performing in the stock market.

Do RSUs pay dividends?

Since RSUs are a promise of stock, they don't have any actual value when you first receive them. RSUs do not pay dividends, which are regular payments that companies make to stockholders, and the only change in value is based on how your employer's stock is performing in the stock market. Once vested, they are only as valuable as the stock for that company, so they may not be as valuable as you expected when you first received them.

What is restricted stock unit?

A Restricted Stock Unit is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the participant ...

What happens if an employee accepts restricted stock units?

Once an employee is granted Restricted Stock Units, the employee must decide whether to accept or decline the grant. If the employee accepts the grant, he may be required to pay the employer a purchase price for the grant. After accepting a grant and providing payment (if applicable), the employee must wait until the grant vests.

What happens when restricted stock units vest?

When Restricted Stock Units vest, the employee receives the shares of company stock or the cash equivalent (depending on the company’s plan rules) without restriction. Your company may allow or require you to defer receipt of the shares or cash equivalent (also depending on the company’s plan rules) until a later date.

Do restricted stock units have to be taxed?

Under normal federal income tax rules, an employee receiving Restricted Stock Units is not taxed at the time of the grant. Instead, the employee is taxed at vesting (when the restrictions lapse) unless the employee chooses to defer receipt of the cash or shares. In these circumstances, the employee must pay statutory minimum taxes as determined by ...

How many RSUs vest after one year?

Here’s an example. Say you’ve been granted 1,500 RSUs and the vesting schedule is 20% after one year of service, and then equal quarterly installments thereafter for the next three years. This would mean that after staying with your company for a year, 300 shares would vest and become yours. For the next three years, every quarter that you remain employed by the company, you’d receive ownership of another 100 shares.

Why do employees hold on to their shares?

Some employees may want to hold on to their shares out of company loyalty or because they believe in the company’s future prospects. However, having too much exposure to one company or stock can result in a concentrated stock position, which can increase the risk of your portfolio. You may choose to sell shares and produce cash to fund other financial goals.

Can a non-public company sell shares?

Private company: If your employer is a nonpublic entity, your shares can’t be easily sold since there is no readily available marketplace. This means that employees may need to fund taxes out of pocket, and explains why some companies issue double-trigger RSUs with a liquidity event provision — when a liquidity event occurs, it offers an opportunity to sell shares. Employees can use that sale to fund the tax liability.

Is selling shares a long term gain?

Selling shares can also have tax consequences if the sale results in a capital gain. Holding shares for over a year before selling qualifies as a long-term capital gain, which is generally subject to less tax than a short-term capital gain.

Why are RSUs important?

RSUs are appealing because if the company performs well and the share price takes off, employees can receive a significant financial benefit. This can motivate employees to take ownership. Since employees need to satisfy vesting requirements, RSUs encourage them to stay for the long term and can improve retention.

Do you have to purchase stock options?

No purchase necessary. With stock options, employees have the right to purchase shares of company stock at a certain price, called the strike or exercise price. With RSUs, the shares become yours upon vesting; there’s no purchase necessary. Since some companies allow you to surrender shares to cover your tax withholding, RSUs typically cost less than stock options for the employee.

What is restricted stock unit?

Restricted stock units (RSUs) are a way your employer can grant you company shares. RSUs are nearly always worth something, even if the stock price drops dramatically. RSUs must vest before you can receive the underlying shares. Job termination usually stops vesting.

Why is a grant restricted?

The grant is "restricted" because it is subject to a vesting schedule, which can be based on length of employment or on performance goals, and because it is governed by other limits on transfers or sales that your company can impose. You typically receive the shares after the vesting date.

How are RSUs taxed?

With RSUs, you are taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares at vesting. You have compensation income subject to federal and employment tax (Social Security and Medicare) and any state and local tax. That income is subject to mandatory supplemental wage withholding. Withholding taxes, which for U.S. employees appear on Form W-2 along with the income, include the following: 1 federal income tax at the flat supplemental wage rate, unless your company uses your W-4 rate 2 Social Security (up to the yearly maximum) and Medicare 3 state and local taxes, when applicable

How long does a vesting schedule last?

Example: You are granted 5,000 RSUs. Your graded vesting schedule spans four years, and 25% of the grant vests each year.

Understanding Restricted Stock Units

• Restricted stock gained popularity as a form of employee compensation as a better alternative to stock options after accounting scandals in the mid-2000s involving companies like Enron and WorldCom came to light. At the end of 2004, the Financial Accounting Standards Board (FASB) i…

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Special Considerations

Advantages and Disadvantages of RSUs

Examples of RSUs