How RSUs Affect Your Take-Home Pay‍

Casey Fenton

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December 7, 2023

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According to a 2017 survey by Glassdoor, as many as 57% of employees claim that benefits and perks are among their top considerations before accepting a job. The trend, as we can see, continues to show this preference to this day. Surprisingly, however, many employees still overlook the power of one crucial benefit: Restricted Stock Units (RSUs). Unlike the usual health insurance and retirement benefits, RSUs are like a financial seed planted today that could bear significant fruit tomorrow.

Navigating the maze of employee benefits can be challenging, but few benefits are as misunderstood—and potentially lucrative—as RSUs. If your employer offers you RSUs, understanding how they affect your take-home pay is essential for optimizing your financial wellness. 

How RSUs Affect My Take-Home Pay

Understanding how RSUs impact your take-home pay can offer you a competitive edge in making the most of your compensation package

When your RSUs "vest," they become yours to sell, transfer, or hold as you see fit. Before vesting, you essentially own a promise of stock, not the stock itself. Vesting periods can vary by company but usually range from one to four years. The moment RSUs vest, their fair market value is considered taxable income. That means the Internal Revenue Service (IRS) sees this as a payday for you—even if you don't sell the stock.

Here's where it gets exciting and nerve-wracking at the same time. If the stock price goes up, the value of your RSUs does too. It's like getting a salary raise without even asking! However, if the stock price drops, the worth of your future RSUs also falls. In other words, the impact on your take-home pay can swing both ways, depending on market conditions.

Remember, RSUs are taxed as ordinary income the moment they vest. If you're already toeing the line of a higher tax bracket, the added income from your vested RSUs could tip you over. Consequently, you'll be paying a higher rate not just on the RSUs but potentially on other income as well. This can lead to an unexpected reduction in your take-home pay.

Although RSUs augment your overall compensation, they don't immediately add to your liquid assets—those assets that you can quickly convert to cash. RSUs will only become liquid once they've vested and you choose to sell them. Until then, you can't count them as part of your accessible cash reserves. For people who like the security of a steady paycheck, this can be both an opportunity and a challenge.

RSUs can also be a significant part of your retirement planning. If you hold on to vested RSUs for a more extended period and the stock appreciates, you can cash out at a later date for potentially huge gains. While this doesn't directly impact your take-home pay, it could profoundly affect your long-term financial health.

Are RSUs Subtracted from My Basic Pay?

No, RSUs are generally not subtracted from your basic pay. They are usually an added component to your overall compensation package. This additional layer of compensation is important to understand for several reasons:

1. Separate From Salary

RSUs are often granted as part of your compensation package, but they are not considered a part of your basic salary. This distinction is important because it means that your core pay remains unaffected by the RSUs you receive. You'll still get your regular paycheck even as you accumulate RSUs.

2. Not Immediate Cash

Unlike your salary, which you receive on a regular basis, RSUs are a form of deferred compensation. They're promises of a future payout, contingent upon you staying with the company until the vesting period is complete. Therefore, they don’t provide immediate financial liquidity in the same way your salary does.

3. Bonus, Not a Deduction

Think of RSUs as a type of bonus that’s tied to both your tenure at the company and its overall performance. They're an incentive for you to stay with the company and contribute to its success, thus raising the stock value. Since they're designed as a bonus, they're not subtracted from your existing pay but are an addition to it.

4. Impact on Tax Liability

Though RSUs aren't taken from your basic pay, they do have tax implications that could affect your take-home pay when they vest. The value of the RSUs at the time of vesting is treated as ordinary income, which means it could bump you into a higher tax bracket, affecting your net income. It's vital to be aware of this during tax planning.

5. Use in Negotiation

Understanding that RSUs are not deducted from your basic pay can give you an edge in salary negotiations. You can leverage RSUs as part of your compensation package if a direct increase in salary isn't on the table. While they don’t add to your immediate cash flow, they have the potential for significant future gains.

So no, RSUs are not subtracted from your basic pay but are a valuable addition to your overall compensation. They come with their own set of rules and implications, which, once understood, can offer you an advantage both in your current role and when negotiating future roles.

How to Calculate Taxes After RSUs Vest

Understanding the tax implications of your RSUs is essential for making informed decisions about your financial future. So how do you go about calculating taxes after your RSUs vest? 

1. Taxes at Vesting

The value of your RSUs at the time of vesting is considered ordinary income. This means they will be taxed at your regular income tax rate. The calculation is straightforward: if you have 100 RSUs vesting and the stock price is $50 per share at that time, you'll have $5,000 added to your income for the year.

2. Withholding Taxes

Your employer will usually withhold a certain percentage of your vested RSUs to cover the tax liability, often around 22% for federal taxes in the United States. However, this withholding might not cover your full tax liability, especially if the additional income pushes you into a higher tax bracket. In that case, you'd be responsible for the difference when you file your taxes.

3. State and Local Taxes

In addition to federal taxes, you may also have to pay state and possibly local income taxes on your vested RSUs. Rates and rules can vary greatly depending on where you live. It's essential to consult state-specific guidelines or a tax advisor to ensure you're compliant.

4. Supplemental Rate

Sometimes, RSUs are taxed at the 'supplemental wage rate,' which is a flat federal rate of 22% (or 37% for amounts over $1 million). While this might seem straightforward, remember that this is just withholding, and the actual taxes owed could be different, requiring you to pay more or entitling you to a refund when you file your annual taxes.

5. Capital Gains Tax

If you decide to hold on to your RSUs after they've vested and then later sell them, you'll also need to consider capital gains tax. If the value of the stock has increased since vesting, you'll pay capital gains tax on the difference between the selling price and the vesting price. If you've held the shares for over a year, you'll pay the long-term capital gains rate, which is typically lower than the short-term rate applied to assets held for less than a year.

6. Tax Planning and Strategies

Given the complexity of RSU taxation, it's wise to consult a tax advisor who specializes in equity compensation. There are various strategies for minimizing the tax impact, such as selling underperforming assets to offset capital gains or timing the sale of your RSUs to optimize your tax situation.

Can I Cash Out My RSUs as Additional Income?

Yes, you can cash out your vested RSUs as additional income. Once RSUs have vested, they are converted into actual shares of stock, which you can then sell to realize the gains. However, the process and implications are a bit more complex than just clicking a 'Sell' button. Let's get into the details.

How to Cash Out

Once your RSUs vest, they usually appear in your brokerage account, ready to be sold. The selling process is often straightforward, but you might encounter transaction fees or brokerage commissions. Be sure to read the fine print before executing the sale.

Immediate Tax Consequences

Cashing out your RSUs means you will need to pay taxes on the gains, as the value of vested RSUs is considered ordinary income. If you sell them immediately upon vesting, your tax rate will likely remain the same, as no additional gains or losses have occurred since vesting.

Timing and Strategy

The decision of when to sell your vested RSUs can significantly impact the amount of money you end up with. If you believe the stock will appreciate, you might decide to hold onto the shares. However, if you're wrong, you risk decreasing the value of this aspect of your compensation. Knowing your financial goals and risk tolerance can help you determine the best time to cash out.

Impact on Take-Home Pay

The immediate benefit of cashing out your RSUs is an increase in your liquid assets. It's a lump sum of money you can allocate as you please, whether it’s paying off debt, investing, or saving. However, this does come at the cost of immediate tax obligations, which can offset some of the gains and reduce your take-home pay.

Diversification Considerations

Cashing out your RSUs can also be a strategy for diversifying your investment portfolio. If a significant portion of your wealth is tied up in your company’s stock, selling some RSUs can help you spread risk by enabling you to invest in other assets.

There’s a psychological benefit to cashing out your RSUs. Converting them into liquid assets can provide peace of mind and a sense of financial security, knowing that you have immediate access to funds if necessary.

Can RSUs Be Cashed Out Even Before Vesting?

Sorry, but the answer is generally no. RSUs are "restricted" for a reason. You'll need to wait for them to vest before you can take any action. However, some companies offer features like early exercise options, but these are relatively rare for RSUs.

Will RSUs Offset My Take-Home Pay?

RSUs will not usually offset your take-home pay, but they will impact your overall tax situation. If you receive a substantial number of RSUs that vest in a single year, you could find yourself in a higher tax bracket, which could potentially reduce your take-home pay for that period.

Tips to Maximize RSU Gains

Who doesn't want to squeeze every ounce of benefit from their RSUs? Here are some pro tips to help you maximize your RSU gains and make them work harder for you.

✔ Understand Your Vesting Schedule

The first step in maximizing your RSU gains is to fully understand your vesting schedule. Knowing when your RSUs will vest allows you to plan your financial moves well in advance. Some companies offer a graded vesting schedule, where a percentage of RSUs vest each year, while others might use a cliff vesting schedule, where all RSUs vest at once after a certain period.

✔ Monitor Stock Performance

Keep an eye on your company’s stock performance. By doing so, you can make informed decisions about when to sell or hold your vested RSUs. While you can't control the market, you can control your reactions to it, and sometimes, timing is everything.

✔ Consult a Tax Advisor

Tax planning is important when it comes to RSUs. As mentioned earlier, RSUs are taxed as ordinary income when they vest. A tax advisor can help you find the best strategies to minimize the tax impact, such as offsetting gains with losses from other investments or optimizing your withholding.

✔ Diversify Your Investments

Don’t put all your eggs in one basket. While RSUs offer a great way to invest in your company, they shouldn’t be your only form of investment. Diversifying your portfolio minimizes risks and gives you a better chance of achieving more consistent returns over time.

✔ Consider Your Overall Financial Goals

Your RSUs should fit into your broader financial strategy. Whether you’re saving for a down payment on a house, building a college fund, or aiming for early retirement, your financial goals will influence how you manage your RSUs. Use them as a tool to help you achieve these goals, rather than viewing them as an isolated aspect of your compensation.

✔ Use RSUs for Leverage in Negotiations

Understanding the value of your RSUs can give you more bargaining power during job negotiations or performance reviews. If a salary bump isn't available, maybe additional RSUs are. Knowing their worth and the potential for future gains can make RSUs a powerful asset in your negotiation toolkit.

✔ Have an Exit Strategy

Finally, have an exit strategy. Whether it's a certain financial milestone you want to reach or a set timeframe you have in mind, knowing when and how you'll sell your RSUs can be just as important as knowing when to hold onto them.

Bottomline

RSUs can be a fantastic addition to your compensation package if you know how to handle them wisely. With careful planning and a deep understanding of their impact on your take-home pay, RSUs can not only make you feel invested in your company but can also offer significant financial rewards.

Knowledge is power. Now that you're armed with this information, make the most of your RSUs. After all, they're not just some corporate jargon; they're a part of your financial future. Treat them as such, and you could reap the rewards for years to come.

Want in on a secret? Explore more on the topic of RSUs on Upstock’s blog or take a peek into our RSU plans through our learning materials here.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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