Restricted Stock Unit (RSU)

What it means

An RSU is a type of bonus. Your company promises to give you actual shares of their stock once you complete certain requirements, like staying at the company for a set number of years. This process is called vesting.

When those requirements are met, you receive the shares. At that moment, the government views the value of those shares as part of your regular pay. A tax professional can help you understand how this fits into your personal financial plan.

A simple example

Imagine Sarah is granted 100 shares. After two years, she hits her vesting date. On that day, the company stock is worth $10 per share. The total value is $1,000. Sarah now owns 100 shares. Her company takes out money for taxes, just like a normal paycheck, based on that $1,000 value. If Sarah sells the shares a year later for $1,200, she only pays taxes on the $200 profit.

Why it matters to you

• You do not have to pay anything to get the shares.
• You must pay taxes on the value of the shares the day they are given to you.
• Any profit you make if the stock price goes up later is taxed as a capital gain.

Common mistakes to avoid

• Forgetting that taxes are taken out when the shares vest, which might result in receiving fewer shares than you expected.
• Assuming you don't owe taxes just because you didn't sell the shares yet.

Words used on this page

• Vesting: The process of waiting for your company's promise of stock to turn into actual ownership.
• Fair Market Value (FMV): The price the stock is worth on the open market at a specific time.
• Withholding: When your employer takes money out of your pay to cover your taxes.
• Ordinary Income: Money you earn from your job that is taxed at your regular tax rate.
• Capital Gain: The profit you make when you sell an asset for more than its original value.