Restricted stock units are a promise from your company to deliver actual shares of the business’s stock at a future date if you meet specific vesting conditions. For many employees, restricted stock units are now a core part of pay packages. This is especially true in the technology and biotech industries and public companies with a strong presence in Raleigh, Durham, and the surrounding area.
If the company you work for has offered restricted stock awards, you may be holding one of the most valuable pieces of your employee compensation; however, RSUs can also be confusing. To understand the financial implications, our Raleigh-area CPAs explain how RSUs work, the tax implications, and the decisions that matter for your vesting schedule.
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Understanding Restricted Stock Units
RSUs are a form of equity compensation granted by an employer to an employee. They represent a promise to deliver company shares or their cash equivalent to the employee at a future date, typically after meeting specific vesting conditions or performance milestones. RSUs are similar to stock options but do not require employees to purchase the stock and are subject to certain restrictions until they vest.
Key Characteristics of RSUs
- RSUs are a form of equity compensation under the Internal Revenue Code
- You do not own anything on the grant date, only a future right
- You gain ownership on the vesting date
- Taxes are triggered when the stock vests
- Value is tied to the share price at vesting
What “Vesting” Means for RSUs
Vesting is the process that turns restricted stock units from a future promise into actual shares you own. Until the vesting conditions are met, usually staying with the company for a set vesting period, the stock units remain unearned and can be forfeited. Once the RSUs vest, the fair market value becomes ordinary income, and the vested shares are yours to hold or sell.
Advantages of RSUs
- No purchase required; you receive actual shares without an exercise price
- Retains value even if the stock price falls, unlike stock options
- Clear link between your work and the company’s future success
- Straightforward form of equity compensation compared with other stock compensation
- Encourages long-term employee retention through the vesting schedule
Risks and Tradeoffs of RSUs
- Large ordinary income in one year can increase taxes and Medicare costs
- Taxes are owed when RSUs vest, even if you do not sell
- Concentration risk in a single company’s stock
- Unvested units can be forfeited if vesting conditions are not met
- Market swings after vesting affect the value of your vested shares
How Restricted Stock Units Work
Every restricted stock grant moves through the same stages: the grant date, the vesting period, the vesting date, and the decision to hold or sell the actual shares. Each stage has different ownership rules under current tax laws.
The Grant Date and What You Really Receive
The grant date is when your company commits to a specific number of stock units to be issued at a future date. Nothing is owned yet. You do not have actual shares, and there are no voting rights. Think of this moment as a contract, not a paycheck.
At this stage:
- The number of restricted stock units RSUs is set
- The vesting schedule is defined
- The share price on the grant day does not control your taxes later
- You cannot sell, transfer, or acquire shares
Many public companies in Raleigh, Durham, and Morrisville include RSUs directly in a job offer to support long-term employee retention and the company’s future success.
The Vesting Date and Tax Recognition
When RSUs vest, ownership flips in a single day. The fair market value of the stock on that vesting date becomes ordinary income to the employee. This is the point when most people feel the tax impact.
Key realities on the vest day:
- The value of the actual shares is treated as regular income
- Employers usually withhold part of the vested shares for taxes
- The withholding applies to federal income taxes and payroll taxes
- Your remaining position becomes real stock
If 800 units shares vest at $45, you recognize $36,000 of income in that year. The number of remaining shares you keep depends on how much is sold for withholding.
Selling or Holding After RSUs Vest
Once you own the actual shares, the decision becomes personal. You can sell immediately or keep the stock and accept future market risk. Any change after vesting results in capital gains or losses based on your cost basis, which is the fair market value on the vesting date.
Employees often ask whether to sell all at once or spread sales across multiple vesting periods. The answer should align with your broader financial goals, cash needs, and exposure to a single company’s stock.
Restricted Stock Unit Tax Implications
The tax implications of RSUs are predictable once you know the timing. The day the stock vests creates income. Everything after that is investment gain or loss.
Ordinary Income at Vesting
The IRS treats the fair market value on the vest day as ordinary income under the Internal Revenue Code. This income shows on your W-2 in the same period as vesting, even if you never sold a share.
- You may need to pay tax beyond what the employer withholds
- High vesting years can push households into higher brackets
- The withholding method affects how many vested shares you keep
Capital Gains After Vesting
If you keep the stock after vesting, later growth is taxed as capital gains taxes rather than wages. The holding period starts the day after vesting.
- Sell quickly: short-term capital gains rates
- Hold over a year: long-term rates
- Losses can offset other gains
Dividend Equivalents
Some plans credit dividend equivalents during the vesting period. These amounts are usually paid or converted when RSUs vest and are taxed as income at that time.
Restricted Stock Unit FAQs
Is 1 RSU equal to 1 share?
Generally yes. One stock unit converts to one actual share once it vests, unless your equity compensation programs specify a cash settlement instead.
Can I cash out restricted stock units?
You can cash out only after shares vest. Before that point, RSUs are a future promise, not property you can sell.
Is paying taxes on RSUs the same as for other stock holdings?
No. Taxes on restricted stock units are triggered when the stock vests and the fair market value is treated as ordinary income, while stocks you buy or sell are taxed only when you sell and realize capital gains.
Do RSUs pay dividends?
Most plans provide dividend equivalents that accumulate and pay when shares vest, but you do not receive regular dividends during the vesting period.
What happens if I leave the company?
Unvested units tied to the vesting schedule are typically forfeited unless the plan includes a double trigger or other special vesting conditions.
Contact a Raleigh CPA Today for Tax Planning in the Triangle
Are you a business owner or an individual with complex financials needing assistance filing your taxes? Steward Ingram and Cooper, PLLC, takes on a limited number of clients each year. To inquire about our current availability and timeline for tax planning and preparation services, including how to report restricted stock units on your yearly tax return, contact us to learn more today.
Get started by calling (919) 872-0866 or filling out the form below.