The Tax Implications of Microsoft Stock Awards 

The Microsoft stock award vesting process and the timing of the exercise have significant tax implications that you need to understand if you want to minimize your tax burden. 

Microsoft vesting schedule and timing of stock awards

With vesting, employees gain full ownership of their Microsoft stock awards over time. When stock awards vest, they directly impact employee compensation. Employees can sell, transfer, or exercise their ownership rights at this point, potentially leading to financial gains based on the stock’s market value. On-hire stock awards are granted and typically vest 25% annually over four years, with the first vesting occurring on your first anniversary with the company. Annual stock awards vest over five years at a rate of 20% per year, with vesting happening quarterly, resulting in 5% of the total award vesting each quarter. At Microsoft, RSUs vest in February, May, August, and November. 

Tax implications of Microsoft stock awards

The tax implications of Microsoft stock awards vary depending on the specific type of award and vesting.  

New hires awarded RSUs do not typically have immediate tax consequences because RSUs aren’t taxed until they vest. When RSUs vest, their fair market value is included in the employee’s taxable income as ordinary income. This amount is also subject to federal income tax, state income tax (if applicable), and FICA (Social Security and Medicare) taxes. 

When new hires receive stock options (different than Restricted Stock Options), they usually do not have immediate tax consequences. Exercised options are taxed, not granted ones. The difference between the exercise price and the stock’s fair market value at exercise is taxed as ordinary income. This amount is also subject to federal income, state income (if applicable), and FICA taxes. 

Any future sales of shares acquired through the exercise of stock options are treated as capital gains or losses.  

As RSUs vest over time for ongoing employees, the fair market value of each vesting RSU is included in the employee’s taxable income as ordinary income at each vesting event; this amount is also subject to federal income, state income (if applicable), and FICA taxes. 

Once the RSUs have vested, any future gains or losses from selling the shares are treated as capital gains or losses. 

Microsoft stock awards: A case study

Let’s consider a scenario where a Microsoft employee, Sarah, receives Restricted Stock Units (RSUs) as part of her compensation package. These RSUs vest over four years at a rate of 25% per year, with the first vesting occurring on her first anniversary with the company.  

Year 1:

• Sarah receives 1,000 RSUs as part of her initial compensation package. 

• At the end of the first year, 25% (250 RSUs) vest. 

• The fair market value of Microsoft stock at the time of vesting is $300 per share. 

• The value of the vested RSUs is 250 * $300 = $75,000. 

• This $75,000 is considered ordinary income for Sarah and is subject to federal income tax, state income tax (if applicable), and FICA taxes. 

Year 2, Year 3, Year 4:

• The remaining RSUs vest at the same rate (25% per year) over the next three years.
• Each year, the fair market value of Microsoft stock at the time of vesting may vary.
• Sarah’s taxable income increases yearly as the RSUs vest — based on the fair market value of the vested shares at each vesting event.

At each vesting event, Sarah receives ownership of the vested RSUs. Suppose Sarah decides to sell the shares immediately upon vesting. In that case, any difference between the sale price and the fair market value of the shares at vesting is considered short-term capital gain or loss, taxed at ordinary income tax rates. 

Tax implications

The value of the vested RSUs is added to Sarah’s annual taxable income as ordinary income. 

Sarah pays taxes on the value of the vested RSUs at her applicable tax rate, including federal, state, and FICA taxes. Any gains or losses from selling the shares acquired through vested RSUs are treated as capital gains or losses. 

Sarah may consider strategic timing for selling the shares to minimize her tax liability, such as waiting for long-term capital gains tax rates if she holds the shares for more than one year after vesting. While there is little control over the ordinary income received throughout the RSUs vesting, there is value in proactively planning ahead and being aware of the taxable income.  

In this scenario, Sarah’s tax implications evolve as her RSUs vest over time, affecting her taxable income and potential capital gains taxes upon selling the shares. 

Consider the timing of when to exercise your Microsoft stock options or sell your shares—or you will face unexpected tax implications.   

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Brighton Jones, LLC), or any non-investment related content, made reference to directly or indirectly in this advertisement will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, this content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this advertisement serves as the receipt of, or as a substitute for, personalized investment advice from Brighton Jones, LLC.  To the extent that you have any questions regarding the applicability of any specific issue discussed above to your individual situation, you are encouraged to consult with a professional advisor of your choosing.  Brighton Jones, LLC is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice. A copy of our current written disclosure statement discussing our advisory services and fees is available on our website and on brokercheck.finra.org.