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Tax Planning Considerations for Vesting Company Stock

July 16, 2021

When dealing with any kind of income, taxes should be a major consideration—especially if you find yourself with stocks or RSUs from an employee compensation plan. While exercising your stock options can be a great bonus to your earnings, it can also lead to a surprisingly high tax bill the following April.

If you find yourself with vested stock, it is important to be aware of all the tax implications that this entails so you can be sure you’re making the right choices with your money—and be certain that you’re getting the most out of every dollar you’ve earned.

What Does it Mean to Have Vested Stock?

When you receive a Restricted Stock Unit (RSU), you are essentially receiving a grant to purchase stock in a company at a fair market price in the future. However, these grants are typically tied to a specified length of employment in order to incentivize employees to remain with the company. For example, a new hire may receive 100 RSUs as part of their compensation package, vested over two years. This means that they will not be able to access the RSUs until they have been employed for two years, but from that point forward, they will be able to purchase their allocated stocks.

When Do I Pay Taxes on Vested Stock?

When stocks are granted to an employee, there is no income tax requirement associated with the grant. However, when the stocks are vested and the options are exercised, that is the calendar year that you will have to pay income tax on the transaction. Whatever money you make off of the exercising of stock options will need to be filed as income on your taxes the following April.

What is My Tax Rate for Vested Stock?

What you ultimately will pay in taxes is entirely dependent on how long you are in possession of the shares in question. If you sell the stock within a year of acquiring it, you will pay short term capital gains tax, which is similar to your ordinary income tax rate. If you own the stock for more than a year, your tax rate will fall under long-term capital gains rates which can be anywhere from zero to 20 percent—and if the total value is over $250k, there will be an additional 3.8% special net investment income tax on top of the regular rate.

If you have an employee compensation plan of any sort, it is important to execute careful planning as you exercise vested stock to avoid paying unnecessary taxes on your income. Whether you’re handling stock investments as a C-Suite individual, an employee with a compensation package, or are a business owner considering these implications for exit planning, working with a financial advisor to plan around these considerations is a must to get the most for your money.

If you need help understanding your stock and RSU compensation or determining the best way to exercise options you were granted, let us help! We can be sure that your money is working as hard as possible—contact us today to learn more.

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.