The Tax Implications of Nike RSUs

Working at Nike offers a range of benefits, including investment opportunities. Employees can receive Restricted Stock Units (RSUs) as part of their corporate compensation package, which can be a valuable way to build wealth and diversify their investments. However, despite their name, RSUs are not the same as stock or restricted stock. Understanding these differences impacts your taxes. 

What are RSUs?

Restricted Stock Units (RSUs) are one of several ways an employer can give their employees shares in the company. One of RSUs’ most significant advantages over stock options is that RSUs are worth something, even as the stock price drops. 

RSUs follow a vesting schedule, where employees receive distributions of the RSUs after meeting specific performance goals, company milestones, or, most commonly, continued employment. The granted RSUs hold no value until they become fully vested. 

Let’s look at a sample scenario: Nike grants you 1,600 RSUs to vest over the next four years (400 shares per year). Each share is worth $75, so the total expected value is $120,000. After the first year, 400 shares would have vested, then 400 more shares the following year, and so on. 

During this time, Nike is likely to experience stock fluctuations, affecting the value of your shares as they vest and your total income from the grant. As shares are fully vested, the value of the RSU becomes ordinary income, and you must pay taxes on it. Nike will withhold a portion of the shares to pay the tax, similar to how they withhold taxes on your paycheck. This ensures you don’t have to come up with a large sum all at once when you file your annual tax return. After vesting and tax withholding, you can keep your RSUs or sell them. 

Tax implications of RSUs for Nike employees

One aspect of RSUs that surprises individuals is that they are taxed at vesting — not at exercise, like stock options. 

Nike RSUs vest over a typical 25-25-25-25 four-year structure that most companies follow. The IRS considers RSU vests “supplemental wages,” which are withheld at 22% up to $1m of income and 37% for income beyond that, regardless of your actual tax rate. If the amount you earn is sizeable, the tax withholdings might not be enough to cover your tax liability, and you’ll need to make up the difference out of pocket. 

If you choose to hold your vested RSUs, you will also have to pay capital gains tax on the difference between the sale price and the price at vest when you sell them in the future. 

Continuing with the earlier example, imagine if the market price at vesting after the first year is $95, which translates into $38,000 of income. Then, the price at vesting in the second year is $105 ($42,000 of income), $120 in the third year ($48,000 of income), and $140 in the fourth year ($56,000). This is a total of $184,000, and each year’s income is taxable on its vesting date when the employee receives the shares. For some, additional annual income isn’t of concern. For others, it is advantageous to control the timing of income, so electing to receive shares through another vehicle, such as stock options, may make sense.  

Now, let‘s say you sell two years after you receive the last of your shares, and the market price is $180 (or $288,000 for 1,600 shares). Your capital gain is $104,000 ($288,000 in current value minus $184,000 in ordinary income) and will be reported on Form 8949 and Schedule D of your income tax return in the year of sale, likely resulting in additional taxes. 

How to maximize Nike RSUs

Nike’s corporate compensation package is attractive in many ways, especially when you know how to optimize your selections. It is essential to consider how financially dependent on the company your situation is (i.e., relying on Nike for both paycheck and investment portfolio) as you consider your options and the best time to sell shares. 

For many individuals, it makes sense to sell shares upon vesting and put the dollars to work in other areas. This might be through paying down debt, saving for retirement in a diversified portfolio, or future college expenses for children. Since you pay taxes upon vesting, selling upon vest often results in minimal tax consequences. 

The information contained in this document is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.