What is a Restricted Stock Unit (RSU) and How is It Taxed?

Sean O’Keefe
Sean O’Keefe

Jul 1, 2022

2 min read
What is a Restricted Stock Unit (RSU) and How is It Taxed?

Employee salaries are a major expense for most startups, which is why many elect to enhance their employee compensation with restricted stock units (RSUs) and other stock options. Such a move offers two advantages: first, it reduces the cashflow requirements for companies that are equity rich and cash strapped, and second, it aligns employee interest with the company's performance and gives employees skin in the game.

RSUs come with unique advantages and tax implications compared to other employee stock options, such as non-incentive stock options (NSO) and incentive stock options (ISO). Here’s a closer look at what you can expect if you receive restricted stock units (RSUs).

What is a Restricted Stock Unit (RSU)?

The term restricted stock unit (RSU) gets its name due to the unique stock limitations. Instead of being able to transfer, donate, or hold onto your stock if you leave the company, RSUs are non transferable and may be forfeited if you get fired or otherwise exit the company before meeting the requirements of your vesting schedule. RSUs at private companies usually have a vesting schedule that has a "double trigger". The first trigger is time, like most security vesting schedules, while the second trigger is an IPO. At public companies the vesting schedule for RSUs is usually only single trigger: time.

How Do RSU Taxes Work?

When it comes to taxes, RSUs follow different rules than other stock options. While some stocks are taxed at the date of sale or exercise, RSUs are taxed at the end of the vesting schedule when they convert to stock.

The amount of the vested stock is considered taxable income on the date it vests or converts to stock. The taxable amount is determined by taking the number of RSUs that vested and multiplying it by the market price per share on the date the RSUs convert to stock.

For example, if 100 RSUs vest and convert to stock on January 1, 2020 and the stock is trading at $10 per share on the stock exchange, then the taxable income from converting your RSUs to stock is $1,000. If you then sell your stock for $11 per share, you would have a taxable capital gain of $1 per share ($11 - $10).

Get Expert Tax Advice with YearEnd

Navigating stock options as a startup employee can be complicated. But consider yourself among the lucky few who have a unique opportunity to boost your income potential.

At YearEnd, we’ve dedicated our team to working specifically with employees of startup companies. Our goal is to help you take advantage of your stock options and tax benefits to make the best financial decisions for your situation. Contact our team today, or head back to the blog for more financial wisdom.

This article is provided for illustrative purposes only; it does not provide personalized tax, legal, financial, or other professional advice. Your situation may be different; consult a professional for information concerning your individual tax, financial, or legal situation before taking any action.