What is the difference between restricted stock and RSUs?

What is the difference between restricted stock and RSUs?

Once your restricted stock shares vest, you own them outright and can sell them at any time. Restricted stock units (RSUs) give you the right to own company stock when you meet certain vesting requirements. But RSUs are not actual stock in the company as is the case with restricted stock.

Does 1 RSU equal 1 stock?

Each RSU will correspond to a certain number and value of employer stock. For example, suppose your RSU agreement states that one RSU corresponds to one share of company stock, which currently trades for $20 per share. If you’re offered 100 RSUs, then your units are worth 100 shares of stock with a value of $2,000.

Which is better restricted stock or stock options?

Plus, restricted shares represent actual shares given to you. You don’t have to buy them. Stock options involve more effort because you must exercise them and buy the underlying shares. There can be different tax implications, as well.

Is restricted stock the same as vesting?

Restricted stock is included in gross income for tax purposes and is recognized on the date when the stocks become transferrable. This is also known as the vesting date.

Why are RSUs called restricted?

A restricted stock unit is a promise made to an employee by an employer to grant a given number of shares of the company’s stock to the employee at a predetermined time in the future. Since RSUs are not actually stocks, but only a right to the promised stock, they carry no voting rights.

Should you sell RSU as soon as they vest?

Sell Them As Soon As They Vest Because RSUs are taxed at the time they vest, there’s no tax advantage for holding on to them. Moreover, investments that are diversified—spread out over many different stocks or bonds—perform better, on average, than investments that are concentrated in one stock.

Should I choose options or RSUs?

Stock options are only valuable if the market value of the stock is higher than the grant price at some point in the vesting period. Otherwise, you’re paying more for the shares than you could in theory sell them for. RSUs, meanwhile, is pure gain, as you don’t have to pay for them.

Do you pay taxes on restricted stock?

If you’re granted a restricted stock award, you have two choices: you can pay ordinary income tax on the award when it’s granted and pay long-term capital gains taxes on the gain when you sell, or you can pay ordinary income tax on the whole amount when it vests.

Do you pay taxes on restricted stock units?

With RSUs, you are taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares at vesting. You have compensation income subject to federal and employment tax (Social Security and Medicare) and any state and local tax.

Why are RSU taxed twice?

The value of your shares when you sell them is $12,000, and since you have a cost basis of $10,000, your gain is $2,000. You then owe tax on the $2,000 gain in addition to the tax on the ordinary income from receiving the RSU shares when they vested.

Why are RSUs taxed so high?

Taxes are usually withheld on income from RSUs. Since RSUs amount to a form of compensation, they become part of your taxable income, and because RSU income is considered supplemental income, the withholding rate can vary from 22% to 37%.

Why do companies switch to RSUs?

The Benefits: RSUs have a few unique benefits that make them an appealing grant structure for a late stage private company. RSUs are generally easier to value than options in that the value when issued is equal to the common stock valuation and typically vest only when certain conditions are met.

How do you avoid taxes on restricted stock units?

If you are holding RSUs to delay paying taxes on the gains, the proceeds from the sale can be used to max out tax-deferred accounts and offset your tax bill (in addition to diversifying your investment portfolio).