For some of you, stock compensation is a big part of your current compensation package. Restricted stock unit (RSU) is probably one of the most common and widespread types of stock compensations nowadays. This week I will list six things that I think you need to know about your RSUs.
1. Restricted Stock Units vs. Restricted Stock
First of all, RSUs are different than restricted stocks. There is only a one-word difference in the name, but they are two different things in nature with varying opportunities for planning. I will focus only on RSUs here and may cover restricted stocks in a separate post.
2. Vesting schedule
Similar to your employer's contribution to your 401(k) accounts, RSUs do not belong to you until vested. In general, your vesting schedule either falls under a "cliff" schedule (100% of your RSUs will be vested at the same time after a certain period) or a "graded" schedule (your RSUs will be vested gradually, e.g., 25% per year and vested in four years). Some RSU plans may have some additional vesting features related to the company's specific performance metrics. Make sure you understand it entirely if it does have additional features.
More importantly, you need to understand what will happen to your vested and unvested RSUs when you leave the company. Sometimes it may be worthwhile to stay until more RSUs are vested.
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. In other words, you could decide when to pay income taxes based on your specific situation.
4. Tax withholdings
Just like your regular wage and salary, your employer will withhold taxes for your RSUs. Social Security and Medicare taxes are usually withheld at vesting. Income taxes are withheld upon delivery. Many companies automatically sell your shares to cover the tax withholdings without giving you a choice. Some companies may offer you different ways to pay withholding taxes including but not limited to paying by personal check or deducting from your paycheck directly. It is useful to choose the best withholding method based on your specific situation. But more importantly, you need to know how much taxes your company will withhold for you, especially income taxes.
RSUs are treated as supplemental income. Many companies withhold federal income taxes on RSUs at a flat rate of 22% (37% for amount over $1 million). If your marginal tax bracket is higher than 22% excluding RSUs, you are most likely not withholding enough. You need to either increase withholding amount from each paycheck by adjusting your W-4 if possible or make quarterly estimated tax payments to avoid a potential penalty for underpayment of estimated tax. Some companies use the same tax rate from your W-4 for your RSUs tax withholdings. If this is the case, you are less likely to have the underpayment of estimated tax issues. If you are not sure, I recommend you consult a tax professional on this based on your specific situation.
RSUs generally do not have voting and dividend rights since they are not actual shares until vesting or delivery. This is also one of the differences between RSUs and restricted stocks. However, some companies may pay or accrue dividend equivalents on RSUs when paying dividends on actual outstanding shares of stock. The accrued dividend equivalents will usually be paid to RSU holders at vesting in cash or additional shares. Another thing worth mentioning here is that if you receive 1099-DIV for those dividend equivalents, check whether they are included in your W-2 already. You don't want to count the same income twice when filing your tax returns.
6. Beneficiary designations
Naming a beneficiary is one of the easiest ways to avoid probate. If you are not familiar with this, you could learn more about it from my previous blog post here. Some RSU plans may allow you to designate a beneficiary, especially if it accelerates vesting or lets vesting continue. Some plans may not explicitly allow or disallow beneficiary designations. In this case, I recommend you suggest your company to consider adding it.
In the end, like other types of stock compensations, RSU plans are very company specific. Each plan can have some special features or provisions which are unique to others and not covered in this post. I recommend you read your plan agreement thoroughly, bring any questions you have to your HR department, or even consult outside professionals if necessary to help you make informed financial decisions and avoid any unintended consequences.