As more private and public companies embrace remote working setups, the traditional ways of compensation are changing. One of the most significant changes is the increasing use of restricted stock units (RSUs) as compensation tools for remote employees.
Remote or virtual work has become increasingly popular in today's globalized economy, with private and public companies leveraging talent from all around the world. As a result, employers are faced with the challenge of providing equitable compensation to their virtual employees, including stock-based incentives.
Apparently, restricted stock units (RSUs) have emerged as the most preferred form of equity-based compensation for remote workers, offering a unique employee benefit and consideration for both employers and employees.
RSUs are a form of equity stock compensation that gives employees the right to receive company stock after a vesting period. They are an attractive compensation tool for both employers and employees, especially for remote staff. This is because they provide a long-term incentive for the employee to stay with the company and align their interests with those of the employer.
In this article, we will delve into the world of restricted stock units RSUs for remote team members, exploring their employee benefits, considerations for employers, taxable income implications, and why RSUs may be the ideal equity package for offshore workers.
But First, Who Are Considered Working Remotely?
Remote staff or virtual employees are individuals who may be key employees yet work for a company without being physically present at its physical location, such as its headquarters or other office premises.
Virtual employees can be categorized into different types, depending on their work arrangements and locations. Two common types include:
1. Remote Independent Contractors
In some cases, companies may engage independent contractors who work remotely, even if they are located in the same region or country as the employer or the key personnel. These independent contractors are not considered key employees, as they are self-employed individuals who provide services or complete tasks under a contract or agreement. However, despite not being resident employees, they may work remotely using their own equipment and resources, and communicate with the employer through technology and communication tools.
b. Offshore Employees
These employees work remotely from a different country than the company's headquarters or office locations. They may be key employees, too, but are located in a different time zone or have different local tax and legal implications compared to other remote staff or employees based at the company's headquarters.
Employers should consult with legal and tax experts for professional advice to ensure compliance with local tax rules and regulations related to remote work and equity compensation, especially for virtual employees located in different countries or jurisdictions who may need to separately file and pay income taxes.
Benefits of RSU for Remote Employees
RSUs offer several benefits to employees working remotely, making them an attractive form of company stock compensation. Some of the key benefits include:
Restricted stock units RSUs allow remote team members to share in the ownership of the company they work for through the company shares issued to them. This can create a sense of ownership, vested interest, and alignment with the company's goals, even for early employees who are not physically located at the company's headquarters.
Restricted stock units (RSUs) are often granted as part of a performance-based compensation package, where the number of RSUs granted is tied to the employee's performance or tenure with the company. This way of incentivizing employees that work offsite makes them perform well, contribute to the company's growth, and stay with the company for the long term. Restricted stock units RSUs can align the interests of offsite employees with those of the company, promoting loyalty and commitment.
Restricted stock units (RSUs) offer remote team members the advantage of deferred taxation. Unlike stock options, where employees may have to pay taxes on the difference between the grant price during the grant date and the stock's fair market value during the exercise date, RSUs are typically taxed only when they vest and the stock shares are delivered to the employee. This allows virtual employees to defer the tax liability until the RSUs are vested and potentially optimize their tax planning.
Flexibility in Stock Sales
Restricted stock units RSUs provide employees working remotely with flexibility in managing their stock sales. Once RSUs vest and the stock shares are delivered, remote team members can choose when to sell the company shares, allowing them to potentially take advantage of favorable market conditions or their personal financial goals. This flexibility can help virtual employees create a personalized strategy for managing their stock-based compensation.
Inclusion in Company's Success
Restricted stock units (RSUs) allow remotely-working employees to participate in the success of the company, just like their in-office counterparts. As the company's stock value increases, the value of RSUs also increases, providing offsite employees with a direct financial incentive to contribute to the company's growth and profitability. This can boost employee morale, motivation, and engagement, leading to increased productivity and loyalty.
Global Equity Participation
Restricted stock units (RSUs) enable offsite employees, regardless of their geographic location, to participate in the company's equity ownership. This can create a sense of inclusion and fairness among employees working offsite, as they have the opportunity to benefit from the same equity program as employees at the headquarters. It can also help promote a global, unified culture within the company, even among virtual employees who may be located in different countries or time zones.
Considerations for Employers Issuing Restricted Stock Units
While restricted stock units (RSUs) can be a valuable form of a stock-based compensation package for remote and telecommuting employees, employers need to carefully consider certain factors when issuing RSUs. Some key considerations for employers include:
Legal and Regulatory Compliance
Employers need to ensure that the RSU equity awards comply with local laws and regulations in the jurisdictions where the telecommuting employees are located. This may involve consulting with legal experts to navigate the complexities of different tax regimes, securities laws, and reporting requirements.
Equity Plan Design
Employers need to design restricted stock units (RSU) plans that align with their overall compensation strategy and goals. This includes determining the appropriate RSU grant size, vesting schedule, and performance metrics, taking into account the unique circumstances of offsite employees.
Part of the design should be tax planning. RSUs typically have a vesting schedule, which specifies the timeline over which the RSUs will vest and become unrestricted. Virtual workers should carefully review the vesting schedule and plan for the tax liability accordingly.
For example, if RSUs are vested over several years, it may result in a large tax liability upon each vesting event. Virtual workers may need to set aside funds to cover taxes, or consider strategies such as selling some of the RSU shares upon vesting to cover tax obligations.
Communication and Education
Employers should communicate the details of RSU equity awards clearly to virtual employees, including the terms, conditions, and tax obligations. Providing education and resources on restricted stock units can help virtual staff understand the value of RSUs and make informed decisions about their stock-based compensation package.
Taxable Income for Remote Team's RSUs
The tax ramifications of RSUs for remote team members can be complex and depend on various factors, including the employee's residency, the company's location, and the RSU plan design. Here are some general considerations:
1. Vesting as a Taxable Event
In many jurisdictions, RSUs are considered taxable on the vesting date, and virtual employees may be required to include the fair market value of the vested RSUs as taxable income in the year of vesting. This may result in immediate tax obligations for virtual employees.
When offsite workers receive Restricted Stock Units (RSUs) once the companies issue equity compensation, there are important tax considerations to keep in mind. RSUs are typically subject to income taxes upon vesting, which is the point at which the RSUs become unrestricted and the remote member receives actual shares of stock. The value of the RSUs at vesting is generally treated as ordinary income and is subject to federal, state, and local income taxes, as well as wage withholding, just like regular income from employment.
Upon vesting, the value of the RSUs is treated as ordinary income for tax purposes. This means that the remote staff must include the value of the RSUs as part of their gross income in the year of vesting, and it is subject to federal, state, and local income taxes, as well as wage withholding. The value of the RSUs is typically based on the fair market value of the underlying shares of stock on the vesting date.
2. Withholding Tax Requirements
Employers may be required to withhold taxes on the RSU income on its vesting date. However, withholding tax requirements can vary across jurisdictions, and employers may need to consider different withholding tax rates and methods for offsite employees in different countries.
3. Foreign Tax Credits and Double Taxation
Telecommuting and offsite employees may be subject to double taxation if the restricted stock units are taxed in both the employee's country of residence and the country where the company is located. To avoid double taxation, virtual employees may be able to claim foreign tax credits for taxes paid on the RSUs in their country of residence, depending on the tax treaty between the two countries.
4. State and Local Taxes
In addition to federal taxes, remote workers may also be subject to state and local income taxes, depending on their state of residence and the location of the company granting the RSUs.
For example, if the remote worker resides in California and the US company is based in California, the RSUs may also be subject to California taxes, including the state income tax and the California Franchise Tax Board requirements. That will have to change if the employee is not a US citizen, though. Thus, It's important for offsite workers to understand the state and local tax liabilities of RSUs and consult with a tax professional to ensure compliance with applicable tax rules.
5. Exchange Rate Fluctuations
RSUs are often granted in the company shares, which can create currency exchange rate risk for employees working offsite who receive payments in their local currency. Employers may consider providing currency conversion services or other measures to help mitigate this risk.
6. Income Tax Treatment for Incentive Stock Options (ISOs)
Unlike RSUs, which are taxed as ordinary income upon vesting, incentive stock options (ISOs) are subject to special tax treatment. If the RSUs are converted to ISOs upon exercise, the virtual worker may be eligible for favorable tax treatment, where the difference between the fair market value of the stock at exercise and the exercise price is treated as long term capital gains instead of ordinary income.
However, ISOs have specific eligibility criteria and holding period requirements that must be met, and it's important for employees working remotely to consult with a tax professional to fully understand the tax liability of ISOs.
7. Long term Capital Gains
Once RSUs have vested and the virtual worker has acquired actual shares of stock, any subsequent gains from the sale of the stock may be subject to long term capital gains tax treatment, depending on the holding period. If the offsite worker holds the shares for more than one year from the vesting date, the gains may qualify for long-term capital gains tax treatment, which generally results in a lower tax rate compared to ordinary income tax rates. This can provide a tax benefit for offsite workers who hold on to the RSU shares for a longer period of time before selling them.
8. Vesting Conditions
RSUs typically have vesting conditions, such as performance-based vesting or time-based vesting, that must be met before the RSUs become unrestricted. Remote staff should thoroughly understand the conditions for the vesting of their RSUs, as they can affect the timing and amount of taxable income. For example, if RSUs are subject to performance-based vesting, the taxable income may not be recognized until the performance conditions are met, which can impact the timing of taxes owed.
9. Tax Planning for Liquidity Events
RSUs may provide virtual workers with an opportunity to participate in a liquidity event, such as an initial public offering (IPO) or acquisition of the company. In such cases, remote members may need to carefully plan for the tax implications of the liquidity event, including the potential tax on capital gains from the sale of RSU shares.
Income Tax Treatment for Offshore Employees
Offshore employees, who work in countries where the company does not have a legal entity or physical presence, may face unique tax considerations when it comes to RSUs. Here are some key points to keep in mind:
1. Tax Residency and Permanent Establishment
An offshore employee who is not a US citizen may be subject to tax in both the country where they reside and the country where the company is located, depending on their tax residency status and whether the company has a permanent establishment in their country of residence.
2. Country or Region-Specific Withholding Tax Requirements
Offshore employees may be subject to withholding tax in the country where the company is located, as well as in their country of residence. Employers may need to determine the appropriate withholding tax rates and methods for offshore employees, based on their tax residency status and local tax regulations.
3. Tax Treaties and Relief
Tax treaties between countries can provide relief from double taxation for offshore employees. Employers should consult tax experts to understand the tax treaty provisions that apply to offshore employees and take advantage of any available tax break or relief.
Favorable tax treatment in certain jurisdictions can also be availed. Virtual workers residing in different jurisdictions or countries may have different tax implications for RSUs. For example, in some jurisdictions, RSUs may be subject to favorable tax treatment, such as lower tax rates or different tax brackets, which can result in potential tax savings.
It's crucial for offsite workers to understand the tax laws and regulations of their specific jurisdiction and consult with a tax professional for professional advice to ensure compliance and take advantage of any potential tax benefits.
Equity Compensation Solutions for Your Remote Team
Restricted stock units (RSUs) can be a valuable form of equity compensation for remote team members, including offshore workers. However, employers need to carefully consider the legal, regulatory, and tax implications of RSUs when designing and implementing equity compensation plans.
Hence, we at Upstock are willing to walk you through the nitty-gritty of the RSU considerations and tax obligations to save you the hassle. That’s on top of saying that restricted stock units (RSUs) are actually the more efficient and flexible “option” for your employees’ equity compensation. Hit us up with a message to learn more about how Upstock makes the employee platform onboarding like a walk in the park.