Restricted Stock Units (RSUS)

What is a Restricted Stock Unit (RSUS)?

An award of stock shares known as a restricted stock unit (RSUS) is frequently issued as a form of employee remuneration. Before the restricted stock units are transferred to the owner, the recipient must satisfy a few requirements.

Employees receive restricted stock units through a vesting plan and distribution schedule if they reach the necessary performance milestones or after working for the company for a specified period of time.

Restricted stock units provide employees a stake in the company's equity, but until they are vested, they are worthless. When they vest, the RSUs are given a fair market value (FMV). Once vested, restricted stock units are treated as income, and a portion of the shares are held back to cover income taxes. The remaining shares are subsequently given to the employee, who has the option to sell them.

Advantages and Disadvantages of RSUs

Advantages

• RSUs offer an incentive for workers to stick with a firm for the long haul and contribute to its success so that the value of their shares rises. The value of the shares less the amount deducted for income taxes and the amount owed in capital gains taxes is what the employee receives if they choose to hang onto their shares until they are fully vested and the company's stock increases.
• Employers incur very little administrative expense because there are no physical shares to maintain and record. RSUs also give companies the option to postpone issuing shares until the vesting schedule is finished, which helps prevent share dilution.

Disadvantages

• Dividends are not offered by RSUs prior to vesting. However, an employer may provide dividend equivalents that can either be reinvestment through the purchase of more shares or transferred into an escrow account to help cover withholding taxes. Section 1244 of the Internal Revenue Code governs the taxation of restricted stock (IRC).
• For tax purposes, restricted stock is recognized on the date it becomes transferable and is included in gross income. The vesting date is another name for this.
• The Internal Revenue Service (IRS) does not view RSUs as tangible property. Hence, they are not eligible for the IRC 83(b) Election, which allows an employee to pay tax before vesting.

Conclusion

If you're thinking about including RSUs as part of your pay package, there are a few factors to keep in mind. It's crucial to first comprehend the tax ramifications of RSUs. The second decision you must make is whether to keep or sell the shares you get. Last but not least, you should have a strategy in place for how you will spend the proceeds from the selling of your shares.