Amazon Employees: Tax Implications of Restricted Stock Units (RSUs)
Thursday, May 23, 2019
Exploring the benefits and tax implications of Amazon RSUs and their role in your portfolio
Amazon’s corporate campus in Seattle, Washington
Part of Amazon’s corporate compensation package includes Restricted Stock Units (RSUs) to help employees diversify their investments. RSUs are not the same as stock options or restricted stock, however, and employees need to understand the differences, particularly as it pertains to taxes.
Let’s take a closer look at what RSUs are, how they differ from stock options, and how you can use this piece of your compensation to its highest potential.
What Are Restricted Stock Units?
Restricted Stock Units are one way an employer can give employees shares of the company. Unlike traditional stock options, RSUs are always worth something, even if the stock price drops.
Employees receive RSUs through a vesting plan and distribution schedule after either meeting certain performance milestones or having been with the company a certain length of time. The stock has no value until the vesting period is complete.
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Let’s use a fictitious example to illustrate how this works:
You receive 100 RSUs to be distributed over four years (25 shares each year). Each share is worth $100, so the total value is roughly $10,000. After the first year, you have 25 vested shares, then 25 more shares the next year, and so on. Of course, the price of the company’s stock would see fluctuations in the time since the original grant, thus impacting the value of each vesting.
When the shares are vested, the value of the stock is considered income, and the employee must pay taxes on that income. Amazon will withhold a portion of the shares to pay those taxes, similar to how you pay taxes every payday. Also, once your shares are vested, you have the option of hanging on to them or selling them at your discretion.
Making Sense of RSU Tax Implications
It’s vital to remember that RSUs are taxed at vesting—not at exercise. This is a common misconception because stock options are taxed only when they are exercised, and this difference catches many people by surprise.
Amazon RSUs vest at 5%-15%-40%-40%, not the typical 25-25-25-25 structure that most companies follow. This often catches Amazon employees off guard because of the tax consequences at years three and four.
RSU vests are considered supplemental wages and are typically withheld by corporations at 22 percent, which may not be enough if the dollar amount is sizable. If this is the case, you could be paying more at tax time than you were expecting.
Once your shares have vested, you’re free to hold onto them or sell them. When you eventually sell, you will pay capital gains tax on the difference between the sale price and vest price. If you hold onto the RSUs for more than one year after you receive the shares, the proceeds from the sales will be subject to the long-term capital gains rate.
RSU vests are considered supplemental wages and are typically withheld by corporations at 22 percent.
For example, let’s say you receive 400 RSUs with a vesting schedule that mirrors Amazon’s 5%-15%-40%-40% structure and a market price of $200.
At vesting in the first year, the market price is $230, which translates into $4,600 of income. The price at vesting in the second year is $250 ($15,000 of income), $270 in the third year ($43,200 of income), and $300 in the fourth year ($48,000). This is a total of $110,800 of income, and each year’s income is taxable on its vesting date when the employee receives the shares.
Now let’s say you sell two years after you receive the last of your shares, and the market price is $500 (or $200,000 for 400 shares). Your capital gain is $89,200 ($200,000 in current value minus $110,800 earned income) and will need to be reported on Form 8949 and Schedule D.
How to Optimize Amazon RSUs
The Amazon corporate compensation package is attractive in many regards, but you can optimize your position with Amazon stock with a little knowledge and attention.
We typically recommend that Amazon employees sell and diversify their RSUs upon vest so they are not as dependent on the company (i.e., dependent on both paycheck and portfolio value) and their monthly cash flow can cover their expenses.
Schedule a consultation with one of our financial advisors to better understand the full costs and benefits of Amazon RSUs so you can avoid tax surprises and keep a healthy amount of employer stock in your overall portfolio.
Brent Ericksen, CFP® serves as an advisor at Brighton Jones.
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