Restricted Stock as Part of Compensation Package

[Seasick Sailor 3747]

Just accepted a new job.  My compensation package includes, in addition to my base salary and annual bonus, ~20% of my base pay in restricted stock that vest at a rate of 25% per year. I assume the stock would be treated as income earned in the year it vest. I think I'll need to hire a CPA to ensure I plan for the tax consequences. Does anyone have any experience with this and any recommendations for the best way to plan for this?

[Parliament 14260]

Tell me you're white, without telling me you're white.

[DFWTexEx 276]

2 hours ago, Seasick Sailor said:

Just accepted a new job.  My compensation package includes, in addition to my base salary and annual bonus, ~20% of my base pay in restricted stock that vest at a rate of 25% per year. I assume the stock would be treated as income earned in the year it vest. I think I'll need to hire a CPA to ensure I plan for the tax consequences. Does anyone have any experience with this and any recommendations for the best way to plan for this?

Yes, the stock is taxed as compensation as it is delivered (when it vests).

[NeverMarryAStripper 21907]

The restricted shares will be assigned a value when they vest and the total value of the vesting shares will be income.  Your tax basis in the shares will be the value assigned at vesting. Generally, the plan will allow for the withholding to be paid in shares.  In other words, a portion of the vesting shares will be used to pay the withholding tax on the total value of the shares vesting and you will receive the remaining shares.  Since the shares withheld will essentially be sold at the vesting value there shouldn't be any gain or loss. This way you're not stuck with a big tax bill the year the shares vest.

DISCLAIMER

I'm a CPA, but the only taxes I do are my own, my kids, and my exes mother (don't ask).  The information above reflects my experience in dealing with restricted stock from an issuer's accounting stand point.

Edited August 11, 2021 by NeverMarryAStripper

[Guest]

1 hour ago, Parliament said:

Tell me you're white, without telling me you're white.

Just accepted a new job?

[CooterBrown 18014]

I get RSAs annually. I select the option to hold back the equivalent stocks as taxes so I don’t have to pay taxes out of pocket on them. For example, if you are allotted 100 shares, you’d actually net around 65 of them with the rest used to pay the income taxes on the award.

[Chewbacca 7780]

2 hours ago, NeverMarryAStripper said:

The restricted shares will be assigned a value when they vest and the total value of the vesting shares will be income.  Your tax basis in the shares will be the value assigned at vesting. Generally, the plan will allow for the withholding to be paid in shares.  In other words, a portion of the vesting shares will be used to pay the withholding tax on the total value of the shares vesting and you will receive the remaining shares.  Since the shares withheld will essentially be sold at the vesting value there shouldn't be any gain or loss. This way you're not stuck with a big tax bill the year the shares vest.

DISCLAIMER

I'm a CPA, but the only taxes I do are my own, my kids, and my exes mother (don't ask).  The information above reflects my experience in dealing with restricted stock from an issuer's accounting stand point.

Wait just a damn minute here!  NMAS is a CPA?  

[fattyflattie 4639]

6 hours ago, Seasick Sailor said:

Does anyone have any experience with this and any recommendations for the best way to plan for this?

Come on bro, you know where you are posting? 

[DonkeyCigars 143]

RSUs work great for big public companies, like Amazon or Microsoft. And sometimes RSUs can work great for private companies. But it has to be a really unique private company for RSUs to make sense. Examples would be a company ramping to its IPO, or a private company that is so profitable or has so much in cash that it can afford to help its employees pay the tax on their vesting unit awards. These are very unusual circumstances.

In most instances, if you are in a startup, your choice of equity award should be either stock options or restricted stock awards.

How do RSUs work?

The company awards you “Restricted Stock Units.” Each unit represents one share of stock to which you will become entitled once your units vest.

For example, you might get 40,000 RSUs, vesting in equal increments over 4 years of service. After 1 year of service, the company would issue you 10,000 shares of stock.

This sounds great, and it is, except for the tax problems.

The Tax Problems

When you receive the 10,000 shares in the example above, you will owe tax on the value of those 10,000 shares at the time the shares are issued. So, in the above example, if after 1 year of service the shares are worth $20 a share, you will owe tax as if you had received $200,000 in cash. You will have to write a check to your employer so that your employer can send your share of the federal income and employment taxes to the IRS. Or you will have to forfeit the shares instead of receiving them.

The tax withholding the company is obligated by law to collect from the employee on $200,000 of income is substantial. You will have to write a big check to the company, or the company won’t have to issue you your shares and you will forfeit them.

On $200,00 in value of vested RSUs, the income tax withholding will be about $50,000 (the supplemental wage withholding rate varies from time to time, but assume the current 25%). In addition to that, there will be FICA or Hospital Insurance taxes. Most employees do not have this kind of money to send to the IRS to receive shares in a private company which can’t be sold.

Big, public companies, like Amazon or Microsoft–can manage this problem. These companies can establish programs that allow their employees to get liquidity on their shares immediately to pay the taxes. This can’t be done in the private company context. So if you receive RSUs in a private company, with no public market for its shares, be careful. You might be stepping into an unexpected tax trap.

https://thestartuplawblog.com/rsus-the-tax-problems/

[hornbri 1398]

Good advice here, I do not think you need to get a CPA just because you have RSUs. If you have other things or just feel more comfortable then great, but they are not difficult to handle or plan for. 

[52-80 19159]

Advice: if you were given a lump sum of cash, would you spend it all on your employer stock?  No?  Sell it the moment it vests.
 

Diversify yo risks. 

 

Dont axe me how I know

[NeverMarryAStripper 21907]

Enron?

[troph 24807]

Missed this. Yes restricted stock is treated as comp as it vests and usually we recommend filing an 83(b) election to accelerate vesting for tax purposes. But that makes the tax due now. When it vests - by contract or artificially by election - the tax is paid on the difference between FMV at the time of vesting and your basis.  Waiting until later for high growth companies can be catastrophic. Typically I counsel clients to elect for accelerated tax vesting and ask for a signing bonus to cover the tax. Election has to be made within 30 days from grant though. 

[Your Mom 4806]

On 8/11/2021 at 4:41 PM, Chewbacca said:

Wait just a damn minute here!  NMAS is a CPA?  

I bet some middle aged cougar is out there posting on a stripper board and calling themselves Neverdivorceacpa. 

[phdhorn 6224]

On 8/11/2021 at 4:57 PM, DonkeyCigars said:

RSUs work great for big public companies, like Amazon or Microsoft. And sometimes RSUs can work great for private companies. But it has to be a really unique private company for RSUs to make sense. Examples would be a company ramping to its IPO, or a private company that is so profitable or has so much in cash that it can afford to help its employees pay the tax on their vesting unit awards. These are very unusual circumstances.

In most instances, if you are in a startup, your choice of equity award should be either stock options or restricted stock awards.

How do RSUs work?

The company awards you “Restricted Stock Units.” Each unit represents one share of stock to which you will become entitled once your units vest.

For example, you might get 40,000 RSUs, vesting in equal increments over 4 years of service. After 1 year of service, the company would issue you 10,000 shares of stock.

This sounds great, and it is, except for the tax problems.

The Tax Problems

When you receive the 10,000 shares in the example above, you will owe tax on the value of those 10,000 shares at the time the shares are issued. So, in the above example, if after 1 year of service the shares are worth $20 a share, you will owe tax as if you had received $200,000 in cash. You will have to write a check to your employer so that your employer can send your share of the federal income and employment taxes to the IRS. Or you will have to forfeit the shares instead of receiving them.

The tax withholding the company is obligated by law to collect from the employee on $200,000 of income is substantial. You will have to write a big check to the company, or the company won’t have to issue you your shares and you will forfeit them.

On $200,00 in value of vested RSUs, the income tax withholding will be about $50,000 (the supplemental wage withholding rate varies from time to time, but assume the current 25%). In addition to that, there will be FICA or Hospital Insurance taxes. Most employees do not have this kind of money to send to the IRS to receive shares in a private company which can’t be sold.

Big, public companies, like Amazon or Microsoft–can manage this problem. These companies can establish programs that allow their employees to get liquidity on their shares immediately to pay the taxes. This can’t be done in the private company context. So if you receive RSUs in a private company, with no public market for its shares, be careful. You might be stepping into an unexpected tax trap.

https://thestartuplawblog.com/rsus-the-tax-problems/

The thing in this example is that few people are given that many shares of RSU's, which yeah, would be a huge income problem.  My wife works for Apple and I do the family finances.  She's gotten several RSU grants in chunks, and most of the time they rarely go over 1,000 shares total - and often this chunk is chopped up and vested in say 6 month or 12 month periods (i.e. those 1,000 shares might have 4 "sections" of 250, each vested on a different, and ensuing date).  We've never had to write a check to anyone and we've never gotten so much income from vesting that we're in the hole - if a company releases shares like that, knowing the employee's standard yearly income, that would be suicidal and no one would work there!  Apple is arguably the largest, or one of the largest companies out there, and they certainly don't grant shares to regular joes in tens of thousands per RSU grant... (maybe the top execs, but they have so much worth, it's probably dog food money).  But even so, those "paltry" grants of a few hundred or whatever shares add up and have done very nicely for us.  And I believe Apple takes the withholding of the tax when granted (I think we can elect otherwise but this works for us).  That only leaves the vesting amount and it's never taken us to a new tax bracket, and maybe adds $1K of income tax.  Nothing that's the horror story mentioned above.

That said, it's usually better to sell the RSU's at, or shortly after vesting, as has been said here.  At the very least, don't let 'em sit forever... turn them into compensation (cash or reinvest in the market) in regular intervals, as some have mentioned here.

I've never heard of anyone having to be out on the "cash plank", ready to drop into the sea of debt, with RSU's... if you are, you're doing it very wrong.  At least if they give someone in tens of thousands of shares per grant (highly unlikely unless you're in the CEO level), pay the tax on the grant immediately and sell them as close to vesting date (unless of course the tax is underwater) as possible (you'll pay capital gains on the difference of the stock price at issuance vs. date sold).

[phdhorn 6224]

Just for laughs here is a schedule for my wife's stock plan the last 5 years - not giving anything away as the prices etc here are public and easily found.

As you can see, the "lumps" granted are small, usually in the tens or low hundreds, at a time.  But the income can add up.  RSU's aren't supposed to be a second income, just a "reward" of a little more income.  The largest grant was 88 shares, the average about 63 shares per grant.  Hardly the 10,000ish nightmare scenario and very manageable. (Note that we cashed out already half of the first 3 (oldest) grants... we do this 2-3 grants (or maybe $50max, whichever is less) at a time.)

 

(FWIW we'll probably cash out the 2-3 oldest ones this year, and we "only" add about $7K to her income and only pay capital gains on like $5K difference in stock price from grant to selling).  But that $83K total figure isn't daunting because we can cash out in pieces.

Bottom line is that hell yes, RSU's are great, and most companies are going to these as opposed to the older stock options, because they actually benefit the employee and the company in their own way.  I would take a job where RSU's are 20% of my income as long as I keep up with them and cash them out when vested or as soon as the stock is reasonably profitable (i.e. not underwater) after that.

Edited September 28, 2021 by phdhorn

[phdhorn 6224]

nm double post

Edited September 28, 2021 by phdhorn

[TKthunder2 4991]

If it’s a growth stock or a good dividend stock, pay to taxes out of pocket.  If not have the taxes paid out of the shares a d cash the rest of that shit out ASAP.

[hornbri 1398]

15 hours ago, phdhorn said:

Just for laughs here is a schedule for my wife's stock plan the last 5 years - not giving anything away as the prices etc here are public and easily found.

As you can see, the "lumps" granted are small, usually in the tens or low hundreds, at a time.  But the income can add up.  RSU's aren't supposed to be a second income, just a "reward" of a little more income.  The largest grant was 88 shares, the average about 63 shares per grant.  Hardly the 10,000ish nightmare scenario and very manageable. (Note that we cashed out already half of the first 3 (oldest) grants... we do this 2-3 grants (or maybe $50max, whichever is less) at a time.)

 

(FWIW we'll probably cash out the 2-3 oldest ones this year, and we "only" add about $7K to her income and only pay capital gains on like $5K difference in stock price from grant to selling).  But that $83K total figure isn't daunting because we can cash out in pieces.

Bottom line is that hell yes, RSU's are great, and most companies are going to these as opposed to the older stock options, because they actually benefit the employee and the company in their own way.  I would take a job where RSU's are 20% of my income as long as I keep up with them and cash them out when vested or as soon as the stock is reasonably profitable (i.e. not underwater) after that.

FYI you posted the ESPP shares not the RSU shares. Those will be grouped a difference section either right above or right below.