Understanding Stock Options, RSUs, and Bonuses: How Professional Women Can Avoid Costly Mistakes

In the professional world, compensation often extends beyond base salary to include benefits such as stock options, restricted stock units (RSUs), and bonuses. Often, early-stage companies offer these types of compensation, but established companies may also tie a portion of an employee's compensation to them.

Stock options, RSUs, and Bonuses are often used as employee recruitment and retention tools, as they are considered attractive benefits to potential employees due to their potential for accumulation. Sometimes these compensation strategies are referred to as 'golden handcuffs' because the employee must remain employed for a set period to liquidate them.

Anyone receiving these forms of compensation must understand how they work and effectively manage them as part of a wealth management strategy. It's also essential to understand the tax consequences of each upon liquidation to avoid costly tax mistakes. Here, we provide an overview of each of these unique forms of compensation.

Stock options

Stock options are a form of employee incentive. Stock options give the employee the right to purchase company shares at a predetermined price now and liquidate them on a future date. While this benefit may lead to significant asset accumulation, understanding when to exercise the option to sell the stock is essential because it affects one's taxes.

How to manage stock options

For non-qualified stock options, the difference between the fair market value (FMV) of the stock and the exercise price paid is considered taxable income. It is essential to plan when to exercise the option and when to sell the stock, as these decisions directly affect one's tax liability. Strategies to prevent tax mistakes with stock options include:

• Spread the liquidation over several years – Spreading can help avoid pushing oneself into a higher tax bracket in any given year from a large stock sale.

• Consider holding the stock – If the stock is held for at least one year after the exercise date and two years from the grant date, any gain is taxed at the typically lower long-term capital gains rate.

Restricted Stock Units (RSUs)

RSUs are company shares awarded to an employee through a vesting plan and distribution schedule, either upon attaining certain performance milestones or upon remaining with their employer for a specified period.

How to manage RSUs

RSUs are taxed when they vest, not when sold. The entire amount of vested stock is treated as income and taxed at one's ordinary income tax rate. To avoid mistakes with RSUs:

• Consider selling a portion of RSUs at vesting – Doing so will help cover the tax bill from future sales.

Tax Tip: Consult a tax professional to understand the tax implications of RSUs, as they can be complex depending on the RSUs' vesting schedule and your personal tax circumstances.

Bonuses

Bonuses are extra compensation awarded to employees, structured as performance, sign-on, or year-end bonuses.

Bonuses are taxed at the same rate as regular wages. The IRS considers bonuses "supplemental wages," but the federal tax rate on bonuses can be much higher depending on the bonus amount.

How to manage bonuses

• Increase payroll tax withholding – Ask your employer to withhold a higher percentage for taxes from your bonus pay to cover the additional tax.

• Contribute to pre-tax retirement accounts – If not already maxing out retirement account contributions, consider using the bonus to do so, which can help lower one's taxable income when deposited into the account before year-end.

• Understand your tax bracket – Knowing your tax bracket can help calculate the potential impact of additional income from stock options, RSUs, or bonuses.

Additional tax tips:

• Keep good records – Track grant dates, vesting schedules, and exercise dates for stock options and RSUs.

• Seek professional guidance – Tax laws regarding unique types of compensation can be complex and change frequently. It's beneficial to consult with financial and tax professionals, as compensation and liquidation timelines depend on one's specific situation.

  
  

In conclusion, stock options, RSUs, and bonuses can be a way to boost income. However, to maximize these benefits and avoid costly tax mistakes, it is crucial to understand the tax implications and use appropriate strategies tailored to your individual circumstances.

Professional women, like all professionals, can benefit from working with a team of financial professionals to manage tax liabilities associated with these forms of compensation proactively.

Important Disclosures:

This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. If you are seeking tax, legal or investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Investing involves risks including possible loss of principal.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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