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The Real Reason why Companies Offer Restricted Stock Units to Employees and how it Benefits Them

Elevate job benefits with these long-term strategies for job perks comparable to cash bonuses according to the experts
Cover Image Source: Pexels|Photo by Karolina Grabowska
Cover Image Source: Pexels|Photo by Karolina Grabowska

Job satisfaction and hefty compensation are considered the most basic factors that make an offer attractive for professionals. But instead of just paying higher salaries, companies have resorted to breaking the compensation into tax, variables, and stock components. One of the most popular instruments that most public companies in the United States offer their employees are “Restricted stock units (RSU)”. Back in 2000, only one-fifth of the public companies gave restricted stocks, but in 2023 the number has jumped significantly to 94%. Companies like Amazon, Apple, Uber, Verizon, Bank of America, Microsoft, and Starbucks are granting restricted stocks to their workforce.

Why companies offer RSU?

One key reason that leads to companies making it a component of the salary structure is the fact that restricted stocks act as golden handcuffs and motivate the employee to stay with the company for a longer tenure. Employees don’t get restricted stocks regularly with their salary, rather a significant portion of RSU gets realized after the employee completes a specific time with the company. The employee generally gets other restricted stocks on an annual basis. Being a stakeholder in the company makes the employee stay with the firm for a longer time and makes them more dedicated towards driving up profits.

One catch with this strategy is that if the employee leaves the company before completing a year, they might lose all or a big part of their restricted stocks. Once the employee gets ownership of the stocks, the employee can have all trading rights as they have for other stocks in the portfolio. The employee can decide to hold the share for a longer period to maximize gains or sell it instantly depending on stock price, company growth, and market dynamics.

Tax strategy for RSU

Employees need to have an elaborate tax strategy if they have RSU as the salary component. When the employees get ownership of the shares, they are also liable to pay taxes on them. Generally, companies deduct 22%or 37% as taxes and if the employee’s tax rate is higher, they would need to pay additional taxes. Depending on in which state the employee lives, and their total salary, the tax rate may vary. Also, the time for which the stocks are owned by the employee also plays a key role in deciding how much tax needs to be paid on selling the stocks. If the employee holds the share for longer than one year and then sells it, then the tax change on profit is termed as long-term capital gains. Generally, the long-term capital gain is lesser and can be 0%, 15%, or 20%.

But if employees sells the stock within one year of getting the ownership, then they need to pay short-term capital tax gain on the profits, which is calculated at the regular income tax rate. Speaking about the matter, Bruce Brumberg, editor-in-chief at myStockOptions said “You have to be aware of that and pick a strategy,” he said. If your company only withholds 22% and your tax bracket is higher, you may need to make quarterly estimated tax payments.”