Home Finance & Fintech What You Need to Know About Stock Options and Restricted Stock Units

What You Need to Know About Stock Options and Restricted Stock Units

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Dollars and cents aren’t the only rewards for the work you do. In some cases, stock options may be offered as part of compensation.

Compensation includes salary, vacation, insurance, stock options and restricted stock units (RSUs). It’s important to keep everything in mind when starting to talk about salary for a position. Because the salary shortfall can be made up with benefits and his RSU.

So what should you know about stock options and RSUs? The knowledge gained from this article will help you when negotiating the terms of your job. Start with a cheat sheet of terms and definitions.

Your Cheat Sheet – Alias ​​Definition

    • What are RSUs? These are restricted stock units that can be offered as part of an employer-provided compensation plan.
    • Why do businesses prefer RSUs? Employers feel more productive because RSUs make employees more interested in company performance.
    • What is the difference between RSUs and stock options? Employees can purchase stock options at specified prices. They are granted based on a set schedule. RSUs are considered “restricted,” and an employer can award her RSUs to top talent based on a set vesting schedule or when agreed-upon performance is achieved.
    • What does vested mean? Shares do not belong to the employee until vested. Stocks cannot be sold until vested. Once vested, it is assigned a fair market value and considered taxable income, available for sale at that time.
    • RSU vs stock options. RSU is considered superior because it can be converted into stock. Options can only be purchased at market prices. His RSUs received today cost nothing and will probably be worth more than the stock price today when it finally vests.

Now that the general knowledge portion of the program is complete, let’s dive into the details of why RSUs and stock options are so important as part of your compensation package.

What are Restricted Stock Units?

It is basically a promise from the employer to the employee. The company believes that the capabilities of the current team and the value you provide will lead to growth. It should be recognized that this promise of future growth is not guaranteed. If you choose to accept the RSU option, you will have to wait. Once the RSUs vest, they will convert to shares.

RSUs are great for ensuring employee retention. If you retire before your RSUs vest, you will lose your RSUs. By adhering to the vesting schedule established by the company, you literally deliver on your promise.

Vesting schedules vary depending on what the company chooses to offer. Some companies align vesting with goals and career advancement, while others adjust the timing of vesting schedules. Timed ones are usually based on years.

For example, if you have a large project in your pipeline, your company may set goals for each part of that project. A number of RSUs will vest when the target is met. Each successfully achieved goal is equivalent to another amount of vested RSUs. Upon completion of the project, all pledged RSUs will vest and employees will have access to stock options.

How are restricted stock units taxed?

This is where RSUs and stock options differ significantly. When your company grants stock options, you don’t have to pay taxes on them until you sell the shares, usually as a capital gain. RSUs, on the other hand, have slightly different tax implications.

RSUs are taxable when established as ordinary income. Depending on your employer, you can choose to withhold a certain amount of RSUs to cover taxes or pay the taxes yourself. These are taxed as ordinary income, so the percentages correspond to which tax bracket you belong to based on your annual income. Many people ask “RSU is taxed twice?” Living in a state with a state income tax can make it look like that. You must pay both federal and state taxes in the US.

If the company you are interviewing offers RSUs as an incentive or as part of your compensation, you should be aware of the current tax amount to understand if the amount offered and the amount of tax you are paying is worth the profit.

According to the IRS, tax bracket that is:

    • 35% for incomes over $231,250 ($462,500 for couples applying jointly).
    • 32% for incomes over $182,100 ($364,200 for couples applying jointly).
    • 24% if income is over $95,375 ($190,750 if a couple applies jointly).
    • 22% if income exceeds $44,725 ($89,450 if a couple files jointly).
    • 12% if income is over $11,000 ($22,000 if a couple applies jointly).

Of course, RSUs and other stock options are only available if you work for a publicly traded company, so they probably fall under a tax rate above 22%.

Need to sell restricted stock units immediately?

The short answer is yes! RSUs are taxed at vesting, so it’s a good idea to take advantage of their value. You can hold onto them, but they are worthless as the performance of a single stock will not make much of a difference in your investment portfolio. That means you need to diversify between equities and bonds.

If you do decide to keep them, it should only be done as part of your strategy and only if you believe the value of the company will increase significantly over time. If you’re starting out and your portfolio doesn’t have the diversity you’re looking for, RSU may be able to help you in that area. Not placing RSUs in a diversified portfolio can be considered tantamount to gambling. The risk probably isn’t worth it.

Will I be taxed if I sell restricted stock units?

It depends. If you sell your RSUs immediately, you will not be taxed on the money you receive because you have already paid your income tax. However, if you hold it and the value fluctuates, you will be taxed on capital gains.

Example of how restricted stock units work

Now that you have a basic understanding of what RSUs mean, RSUs and stock options, RSU vesting, stock options as rewards, etc., let’s look at scenarios to see how they work.

Sam is interviewing for the ACME Rockets. The hiring manager gives Sam his 2,000 RSU to complement the job’s salary package. According to the company’s vesting schedule, RSUs will be vested at a rate of 400 RSUs each year from his one-year anniversary.

Five years later, Sam has a full vested interest. He will pay them his 24% tax based on his income bracket and will own his 2,000 shares of stock in the company. Once Sam got to that point, he decided to sell them immediately. This makes his RSU equivalent to a cash bonus.

Always remember that you are in control of your finances. If you are interviewing for a company that offers stock options or restricted stock units as part of their compensation package, feel free to negotiate the amount. If you disagree with the RSUs they offer, you can negotiate the wages they pay. Compensation is rarely fixed in a job offer. It is negotiable and should be negotiated.

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