In this month's newsletter, we will be discussing the common tax and financial planning considerations that arise with RSUs, or Restricted Stock Units. RSUs are a popular form of equity compensation that companies use to incentivize their employees. While RSUs can be a great way to motivate and reward employees, they come with their own set of challenges. Unlike stock options, RSUs don't give employees the right to purchase company stock at a specific price. Instead, RSUs are a promise from the company to grant employees a certain number of shares after a set period of time has elapsed (vesting).

One obvious risk with RSUs is that the value of the shares can be unpredictable. Even though RSUs are a promise from the company to grant shares, the actual value of those shares can fluctuate depending on the stock price. This means that employees may not know exactly how much their RSUs are worth until the shares have vested. Further, if an employee works for a private company, they may have minimal transparency on price and no control over when they can sell shares.

Additionally, RSUs are known to create tax complexity. The value of the shares granted at vesting is generally taxed as ordinary income. Depending on the company, employees may have the option to sell some of the shares to cover the tax bill. A common issue arises when the tax withholding amounts on RSUs are different than the rest of the employee’s income. It is common to see cases where employees are underpaying taxes oblivious to the fact that they may have a large tax bill and penalties at filing.

Finally, consider the tax implications of selling shares if that option is available. Look out for holding period rules for capital gain tax. Employees should verify that 1099-B tax documents received from the custodian where shares are held accurately portrays the cost basis of the shares. The cost basis should equal the share price at vesting. If an employee waits a year after vesting to sell any gains will be subject to lower long term capital gain tax. Any losses could be used to offset income and other gains in an employee’s portfolio.

Overall, while RSUs can be a valuable form of equity compensation, they do come with their own set of challenges. To mitigate these issues, it's important to fully understand how RSUs work, be prepared for the tax implications, and carefully consider the risks.