Restricted Stock Units: Taxes, Vesting and Key RSU Facts

Executive Summary: What Are RSUs and How Are They Taxed?

Restricted stock units (RSUs) are stock grants from an employer that give employees shares of company stock at no cost to the employee, but the shares are subject to vesting. Until vested, RSUs generally have no value. Vesting is typically time-based over four to five years, though employees at private companies or startups may have double-trigger RSUs that require a liquidity event to vest.

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At grant, there are no tax implications. When RSUs vest, their full value is taxed as ordinary income, subject to federal, state, and local taxes as well as Medicare and Social Security payroll taxes. Employers automatically withhold taxes at vesting — though this may not cover your full tax liability. If you sell shares immediately at vesting, there are no further tax implications. If you hold them, any subsequent gain or loss is taxed as a short- or long-term capital gain, depending on how long you hold the shares.

What Are Restricted Stock Units (RSUs)?

Restricted stock units are equity grants from your employer. RSUs are grants of stock at no cost to the employee, but the shares are subject to vesting. Unvested RSUs typically have no value. Restricted stock units pay out in cash or shares of stock at vesting.

Many public companies require time-based vesting (single trigger) but some private companies, like SpaceX, also use only time-based vesting. When RSUs are granted at a startup or private company, there’s usually time-based vesting and liquidity-based vesting (double trigger RSUs), often in conjunction with an IPO, funding, or acquisition. Time-based vesting is usually over four or five years, starting with a one-year cliff and monthly vesting thereafter.

Performance stock units are similar to RSUs and are most common in public companies. Here, vesting is contingent on the company or business unit achieving certain targets (stock price, profitability, etc.) over a set period. More on RSUs versus PSUs, restricted stock, and stock options later.

How Are Restricted Stock Units Taxed?

At grant, there are no tax implications for RSUs. When your RSUs vest, they are no longer considered restricted stock units; rather, you become a common stock shareholder in the company. The value of your equity grant will be determined by the current value of the stock when it vests. RSUs are settled in cash or stock.

The tax treatment of restricted stock units is fairly straightforward. For U.S. employees, the entire value of the vesting shares is taxable as ordinary income for tax purposes. Regular W-2 income is subject to federal, state, and local taxes in addition to payroll taxes from Medicare and Social Security.

You cannot make an 83(b) election with restricted stock units like you can with restricted stock, so there isn’t an option to be taxed on the value of RSUs prior to vesting.

RSU Tax Withholding

Employers automatically withhold a portion of vesting stock or cash proceeds for taxes. But additional tax planning may be required, as withholding may be insufficient. RSUs are considered supplemental income and companies usually only withhold at the supplemental rates (22% if under $1M, 37% if greater than $1M).

Because minimum tax withholding is required at vesting, most private companies don’t use single-trigger RSUs. However, SpaceX is a notable example, allowing employees to meet tax withholding by coming up with the cash or forfeiting some of their vesting shares.

At public companies, the default method is usually a sell-to-cover transaction where a certain number of restricted stock units are sold to meet tax withholding. But again, the standard supplemental withholding may not be enough to cover your true tax liability, which could be an issue if you don’t sell the remaining shares.

Taxes When Selling RSUs

If the stock is all sold at vesting, there are no additional tax implications. This makes sense in most situations at public companies. After all, you are paying tax on the full value of the shares when they vest, regardless.

However, if shares are held after vesting, the cost basis will be determined by the market value of the stock at vesting, and any further gain or loss will be a short-term or long-term capital gain (or loss) depending on the holding period.

Cost Basis Tax Reporting Tips to Avoid Double Taxation on RSUs

Remember, when restricted stock units vest, the event is taxable as ordinary income based on the stock’s price at vesting. So that price becomes your new cost basis, which determines any subsequent taxable gain or loss.

When selling restricted stock units, don’t rely solely on the 1099-B tax form. Doing so could result in paying tax twice. The 1099-B might reflect a zero cost basis on your RSUs. Wait for the Supplemental Information form and refer to that for important adjustments to your cost basis. Here’s a detailed explainer if you file your own taxes. If you have a CPA, remember to send them both the 1099-B and the Supplemental form.

When a company is bought out, a number of things can happen with RSUs. Remember, restricted stock units represent unvested shares. Fully vested RSUs that haven’t been sold become shares of common stock.

Double-trigger RSUs receive accelerated vesting when the acquisition is complete and are paid out in cash or stock of the acquiring company, but this can be true for single-trigger RSUs, too. Otherwise, the acquiring company can assume the grants for continued vesting, or cancel them.

The terms of the deal play a large role in what happens to RSUs in an acquisition. If you have multiple forms of equity compensation, each type could be treated differently. This article has more on what can happen to your RSUs in an acquisition.

What Happens To RSUs When You Leave A Company

If you have single-trigger RSUs and leave the company to work elsewhere, in all likelihood you will forfeit the rest of your grant (as it is unvested). However, if you retire, are laid off, die, or are disabled, the company may have different rules. If you have double-trigger RSUs and have met time-based vesting, you may be able to keep your time-vested shares when you leave. If you are fired, it is unlikely you will retain the RSUs, though it could depend on whether the termination was deemed to be for cause.

RSUs In An IPO or SPAC

Double-trigger RSUs may need an initial public offering to vest. When this happens, the company allows for sales of stock to meet withholding requirements, even during a lockup. RSUs will continue to vest as usual and new rules covering blackout periods and trading windows will apply as a public company employee. Luckily, there are ways to diversify out of a concentrated position, and the IPO makes it easier. This article has more on the impact on employees with RSUs after a company goes public.

Diversifying

If one stock makes up more than 10% of your overall asset allocation, it’s probably too much. A diversified portfolio is the cornerstone of a risk-adjusted investment strategy. Since single stocks don’t move like the broader market, you’re exposed to much greater risk. Here are strategies to reduce the risk of concentrated stock holdings. Although not all these approaches will be right for every investor, often it’s advantageous to consider multiple strategies to diversify. We often use these trading strategies when helping executives, current and former employees, and founders diversify company stock after going public.

1. Trading Options Contracts
2. Outright Sales
3. Custom Diversification Using Solutions Like Direct Indexing
4. Exchange Funds
5. 351 ETF Exchange
6. Charitable Contributions
7. Gifting

Read the article on ways to diversify vested RSUs (common stock) and vesting shares.

RSUs vs Restricted Stock, Performance Shares, Options

Restricted Stock Units vs Restricted Stock Awards

What is the difference between restricted stock awards (RSAs) and restricted stock units? With both restricted stock units and awards, vesting may be time-or performance-based and cash or shares could be delivered upon vesting. Both are eligible to receive dividends (or cash equivalents) on unvested shares (either as they’re issued or at vesting). However, this is subject to plan terms.

But unlike restricted stock, where there can be a purchase price, employees don’t buy RSUs. So unless the stock goes to zero, vested RSUs always have value. Employees with RSUs cannot make an 83(b) election. And since grants of restricted stock units don’t represent an ownership interest until shares vest, there are no voting rights.

Assuming a restricted stock award recipient doesn’t make an 83(b) election, the tax treatment is the same for employees of public companies. When restricted stock units are given to employees at private companies, they’re usually subject to double-trigger vesting. This delays income tax implications until the company has a liquidity event.

Performance Stock Units (And Awards) vs RSUs and RSAs

Performance stock awards (PSAs) and performance stock units (PSUs) are variations of RSAs and RSUs, respectively. Like RSUs compared to RSAs, PSUs are generally more common than PSAs.

The key difference between restricted and performance stock awards/units is the vesting requirement, which determine how many shares will be distributed. Performance stock only vests if company and/or individual business milestones or goals are met within a specified time frame.

Further, the number of shares (or cash equivalent) you might receive is usually based on actual performance relative to target. For example, if the company exceeds earnings per share (EPS) goals, you could be given over 100% of the target grant amount. Or if EPS fell short of the target but was still within a certain range (as stated in your grant), then fewer shares could be released. If performance goals are missed, you may get nothing.

Otherwise, the tax implications for PSUs are generally similar to RSUs. The taxation of PSAs (including the potential for an 83(b) election) is generally similar to RSAs.

Restricted Stock Units vs Stock Options

Restricted stock units are a form of equity compensation, but they’re not stock options. A stock option grant gives you the right to buy a set number of shares at a fixed price for a certain period of time. This right is usually contingent upon meeting time-based vesting requirements, but, like RSUs, there can be different ways to vest. Stock options must be paid for; the price is called the exercise price or strike price. There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs).

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