Has your employer provided you with rewards in the form of restricted stock units? Also known as RSUs, restricted stock units refer to a type of compensation that doesn’t vest right away. Unlike traditional stock options, RSUs don’t have immediate value; instead, they will be worth money at some time in the future, assuming that the company stock remains valuable.

Receiving RSUs as part of your employee compensation package can be exciting. However, recipients should note that they will be taxed on restricted stock units once they vest. At the time the shares are vested, owners must pay taxes on their current value. Unfortunately, the tax rules surrounding restricted stock units are complex, and owners often make mistakes that lead to overpayment, underpayment, or even an IRS audit. Keep reading to learn more about restricted stock units and how they can cause issues with financial planning.

 

Understanding the Value of Your Stock

Receiving stock units from your company can certainly feel good, especially if it’s a reward for a job well done. However, employees should be cognizant of the fact that these incentives don’t have value at the time they are awarded/granted. Until your RSUs vest and are delivered, they cannot be spent. Employees need to keep this fact in mind for financial planning purposes and as they continue planning for large purchases like cars and houses. Working with a CERTIFIED FINANCIAL PLANNERTM can help you develop a financial plan and incorporate your RSUs into your overall plan. This will help you understand the financial implications of the choices available to you regarding your RSUs as well as the potential risks of owning a concentrated position in your company stock.

 

Understanding the Pay-As-You-Go System and Income Reporting

One of the challenges associated with restricted stock units is ensuring that the appropriate amount of taxes are paid as the shares vest and are delivered throughout the year. In the United States, citizens are subject to a pay-as-you-go tax system. In other words, individuals must pay income tax as they earn it rather than waiting until the end of the year when they file their taxes.

Most companies automatically withhold a default percentage of 22% for taxes on RSUs but in most cases not enough to cover the tax liability at the end of the year. Paying the default tax withholding on your RSUs or failing to make tax payments on your vested RSUs throughout the year may result in penalties for underpayment of taxes.

It’s important to note that restricted stock units may vest over a period of several years, typically over 4 years with a quarterly vest. If your stock vests at a certain percentage throughout the year, you are responsible for paying the taxes for each vesting slice. Waiting to pay taxes on income until the end of the year can subject you to tax penalties.

 

Reporting Stock Sales

Paying estimated taxes on RSUs is only one of the challenges associated with this form of compensation. Recipients also need to consider the nuances of selling the vested shares and accounting for issues such as any blackout windows, lockup periods, cost basis, and holding periods to manage the short and long-term tax implications.

Be sure to report the sale of stock with the help of a tax professional or by reporting on Form 8949 and Schedule D.

 

Make Concentrum Wealth Management Your Financial Planning Partner

Financial planning is a challenge under normal circumstances, and dealing with restricted unit stocks can add to the stress. Fortunately, Concentrum Wealth Management is here to ease the burden. Calling on years of experience, our team specializes in thoroughly analyzing clients’ financial circumstances in order to help them achieve their goals.

 

Ready to start planning for a brighter future? Call today at (408) 840-4030, or contact our team online.