Restricted stock units (RSUs)
A promise from an employer to give an employee company shares once vesting conditions are met, typically after staying a set length of time.
What it means
Restricted stock units are a form of equity pay. The employer grants a number of units that convert into actual shares, or sometimes cash, as they vest, usually over several years and often with a cliff. Unlike stock options, RSUs have value as long as the share price is above zero, because nothing has to be paid to receive them.
RSUs are taxed as ordinary income when they vest, based on the shares’ market value that day, and the amount appears on the employee’s W-2. Employers usually withhold taxes, often by holding back some shares, but the standard withholding rate may be less than the employee’s actual tax rate. The value at vesting becomes the cost basis, so later gains or losses on the shares are capital gains or losses.
Example
Suppose 200 RSUs vest when the stock trades at $50. The employee has $10,000 of taxable wages that year, and their cost basis is $50 a share. If they later sell at $60 a share, the extra $2,000 is a capital gain, short or long term depending on how long they held the shares after vesting.
How it’s used
- Evaluating a job offer or total compensation
- Planning taxes in a year with large vests
- Deciding whether to keep or sell vested shares
Strengths and weaknesses
Strengths
- Retain value even if the share price falls
- No cash needed to receive the shares
- Can be a large part of total pay at some employers
Weaknesses
- Taxed as income at vesting whether or not shares are sold
- Withholding may fall short of the actual tax owed
- Holding vested shares concentrates risk in the employer
- Unvested units are usually forfeited on leaving
Good to know
- Holding vested RSUs is economically similar to receiving the same amount in cash and buying employer stock with it.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.