Restricted Stock Units, the "Need to Knows"

Companies like to offer Restricted Stock Units, to encourage their employees to stay with the company. Typically, each year, a certain percentage of this stock will vest.

For example, suppose your company offers you $10,000 of restricted stock units which vest at 20% annually. Then, 1 year after your start date, you will be given $2,000 worth of stock. Since you have not yet paid taxes on this money, in most cases, the company will withhold some of this stock for tax purposes. So the company might withhold $500 worth of stock and give you $1,500 worth of stock.

Effectively, this is the same as if company withheld $500 for federal tax purposes, paid you $1,500 and you immediately purchase $1,500 worth of stock.

As such, at the end of the year, you will report $2,000 of ordinary income and have to pay taxes, of which the $500 withheld will be credited when you do your taxes. You have the option to sell the stock within the year, which would result in a short term capital gain or loss or you can sell the stock after a year, which would result in a long term capital gain or loss.

In general, losses can be used to offset income (at a rate of $1,500/$3,000 per year for single/married people, for which the remaining loss is carried over to the next year), short term capital gains are taxed as regular income and long term capital gains are taxed at 15% (which is typically lower). See www.irs.gov for more information.

This post was reposted from http://finlit.biz/business/restricted-stock-units-the-need-to-knows/, originally written on January 28th, 2014.