Amazon Employees: Tax Implications of Restricted Stock Units (RSUs)
Exploring the benefits and tax implications of Amazon RSUs and their role in your portfolio
Part of Amazon’s corporate compensation package includes restricted stock units (RSUs), offering employees an interest in company stock. However, RSUs differ from stock options and restricted stock, particularly when it comes to taxes.
Let’s take a closer look at RSUs and how you can use this piece of your compensation to its highest potential.
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 having been with the company for a certain length of time.
Let’s use a fictitious example to illustrate how this works:
You receive 100 RSUs set for distribution 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 vest, the value of the stock becomes 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 vest, you have the option of hanging on to them or selling them at your discretion.
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Making Sense of RSU Tax Implications
It’s vital to remember that RSUs are taxed at vesting—not at an exercise. This is a common misconception because stock options are taxed when they are exercised.
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 find yourself with a large tax liability when you go to file your taxes.
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.
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), a total to report on Form 8949 and Schedule D.
How to Optimize Amazon RSUs
The Amazon corporate compensation package is attractive in many regards, and you can optimize your personal plan with strategic use of Amazon restricted stock units.
In many instances, we 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 so they can take advantage of other company benefits and work toward personal goals.
The information included here is based solely on the knowledge of Brighton Jones financial advisors, and does not represent the views or advice of Amazon. Amazon did not contribute, review, or approve this content. Note that this content is intended for U.S.-based Amazon employees only.