I provide expert guidance on RSUs and stock options to help you navigate the complexities of equity compensation. I can assist you in understanding the differences between RSUs and stock options and the best strategies to maximize your benefits.
Let’s say you receive a job offer from a publicly-traded company that includes a $600,000 RSU grant:
When you receive the 1,500 stocks after year one, the value of these shares is taxed as income. If the stock price rises to $105, the RSU income is $157,500 (1,500 * $105). And every RSU tranche vesting quarterly thereafter is income.
RSUs, commissions, and bonuses are examples of non-paycheck income broadly known as “supplemental wages.” Part of the taxes are paid when the non-paycheck income is received, and the rest is due by the following April 15th.
To cover the tax payment when the RSUs vest, your employer must withhold taxes on your behalf:
By next April 15th, you must pay the balance due, if applicable. Believe it or not, the 22% federal and 10.23% California withholdings may not cover your full tax liability. Work with a tax professional to figure out whether to pay estimated taxes throughout the year (rather than waiting until next April 15th to pay the balance due), particularly if you’re a single filer earning >$165,000 (or married filing jointly earning >$330,000). Otherwise, you risk incurring a late payment penalty from the IRS and California FTB.
This refers to your equity plan administrator withholding shares for taxes as soon as your RSUs vest. This is also known as sell-to-cover settlement.
The dollar value of the total taxes divided by the stock price determines how many shares are withheld to be sold for taxes in the RSU net settlement, aka sell-to-cover settlement.
The RSU net shares are then deposited to your equity account 2-3 business days after the vesting date.
Employee stock options give you the right (not requirement) to buy company stock (“exercise”) for a fixed price (“strike price”) for a fixed period of time (usually 10 years). Once you exercise options, you own company stock.
To make money from stock options, whether Incentive Stock Options (ISOs) or Non-qualified Stock Options (NSOs), the hope is that the company’s stock price will be significantly higher than your strike price.
Example: your strike price is $2, and you exercise stock options when the stock is worth $10.
You’ve paid $2 for shares that are worth $10. This $8 spread is also known as the bargain element. The taxation of the bargain element differs for ISOs versus NSOs.
If you later sell the stocks for $20 per share, the $10 ($20 sale price minus $10 cost basis) is capital gain.
HOW TO PAY EXERCISE COST AND TAXES¹
You need cash to: (1) exercise the options (pay the strike price), and (2) pay taxes.
If you have 2,500 vested options at $2 strike price, you’ll need $5,000 cash to exercise the options.
If you have 2,500 vested options at $20 strike price, then you’ll have to cough up $50,000, which is a significant amount of cash for most people.
Exercising options is a taxable event. You’ll owe income taxes after exercising NSOs, and after a disqualifying disposition of ISOs. You may owe AMT after exercising ISOs if you don’t sell the shares in the year of exercise.
Consult a tax professional or financial planner with stock option expertise to run a tax projection before you exercise stock options.
¹ Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied on for the purpose of avoiding any tax penalties. You should discuss any tax or legal matters with the appropriate professional.
McW Wealth Management offers securities through International Assets Advisory, LLC (“IAA”) – Member FINRA/SIPC. Advisory services offered through International Assets Investment Management, LLC (“IAIM”) –SEC Registered Investment Advisor. McW Wealth Management is unaffiliated with IAA and IAIM.
McW Wealth Management may only conduct business with residents of the states for which they are properly registered, therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. This site and the content herein are subject to certain Legal Notices.
¹ Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied on for the purpose of avoiding any tax penalties. You should discuss any tax or legal matters with the appropriate professional.
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