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Credo Wealth Management is an independent RIA (Registered Investment Advisor) in San Francisco that takes pride in giving sound, affordable and independent advice in the context of a financial plan.
Here is our check list of common mistakes you need to avoid when dealing with equity compensation. We are happy to offer a free consultation if you have any questions or if you would like to know how this applies to your unique personal situation.
It can be tempting to let your equity benefits sit on autopilot, especially if you have no immediate plans to sell the stock. However, it is key to take a strategic approach because equity compensation usually comes with unique rules, tax implications and liquidity challenge.
Stock benefits are part of your overall compensation and need to be treated as such.
When RSUs vest, they become ordinary stock and become part of your taxable income. RSUs do not have any value to you until it vests. When RSUs vest, they become actual stocks which are reported as part of your compensation income. This income will be reported in your W-2 and is subject to ordinary income tax, state, and local taxes.
Some employees look at the gross value of their RSUs and think that is what they are going to cash in and walk away with. However, note that upon vesting, approximately 40% will be withheld for taxes. If you live in a high-income tax state like California where the highest income tax rate is 13.3%, your tax due on your RSU income could be as high as 50%! To help you pay for these taxes, some companies allow you to “tender” some or all your shares to cover withholding taxes.
The financial planning rule of thumb says that no one should have more than 10-15% of their investment assets in any ONE stock. What can you do if you are over-concentrated in one stock? No one wants a big tax hit. One of the easiest things to do when an RSU vests, is to sell it the next day. For example, let’s say your 100 XYZ RSU vests on 10/1/21 at $25. On 10/2/2021 you should have approximately 60 shares of XYZ stock in your account to sell (minus 40% of the shares withhold for ordinary income taxes). Let’s say the share prices fluctuates a bit between 10/1 and 10/2 and you sell the shares at $25.15 per share or a gain of $9 total in short-term gains. That is much more palatable than selling a chunk of long-term held stock and taking a tax hit of $20,000.
Your Employee Stock Purchase Program (ESPP) is what we call the “souped up savings plan.” An ESPP is one of the most valuable ways to participate in the success of your company. It allows you to buy your company stock at a discount. In most cases, you can contribute anywhere between 2 percent and 15 percent of your salary, or up to $25,000 per year. Some companies sweeten the deal with what’s called a look back provision, which lets you choose to buy the company’s stock based on its closing price on the first day of the offering period or the last day of each purchase period —whichever is lower.
Some employees fail to tell their CPA that the stock sold on their 1099s were in fact Restricted Stock Units (RSUs) and taxes have already been withheld and are shown on the W-2 from the company. This can cause paying more and messing up on your taxes. As a result, employees often will often pay more taxes than they need to.
Some financial advisors will lure you in with the expertise in “complex” stock option strategies such as an “Exchange Fund” or “equity collar.” In our option, they are all expensive ways to delay the inevitable taxable event. There is nothing wrong with taking 10% off the table every year; particularly, in our current historically low tax environment.
You should always keep a spreadsheet of all your equity awards, when they are awarded, vested, sold, with dates and prices.
What if you retired and lived in Paradise, CA and lost your house and certificates to fire? There is absolutely no reason to keep paper certificates; they should be held in a brokerage account. If you would like to find out more about one or more of these points or discuss possible strategies to maximize your equity compensation, please let us know at info@credowm.com.
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Credo Wealth Management is an independent RIA (Registered Investment Advisor) in San Francisco that takes pride in giving sound, affordable and independent advice in the context of a financial plan.
Here is our check list of common mistakes you need to avoid when dealing with equity compensation. We are happy to offer a free consultation if you have any questions or if you would like to know how this applies to your unique personal situation.
It can be tempting to let your equity benefits sit on autopilot, especially if you have no immediate plans to sell the stock. However, it is key to take a strategic approach because equity compensation usually comes with unique rules, tax implications and liquidity challenge.
Stock benefits are part of your overall compensation and need to be treated as such.
When RSUs vest, they become ordinary stock and become part of your taxable income. RSUs do not have any value to you until it vests. When RSUs vest, they become actual stocks which are reported as part of your compensation income. This income will be reported in your W-2 and is subject to ordinary income tax, state, and local taxes.
Some employees look at the gross value of their RSUs and think that is what they are going to cash in and walk away with. However, note that upon vesting, approximately 40% will be withheld for taxes. If you live in a high-income tax state like California where the highest income tax rate is 13.3%, your tax due on your RSU income could be as high as 50%! To help you pay for these taxes, some companies allow you to “tender” some or all your shares to cover withholding taxes.
The financial planning rule of thumb says that no one should have more than 10-15% of their investment assets in any ONE stock. What can you do if you are over-concentrated in one stock? No one wants a big tax hit. One of the easiest things to do when an RSU vests, is to sell it the next day. For example, let’s say your 100 XYZ RSU vests on 10/1/21 at $25. On 10/2/2021 you should have approximately 60 shares of XYZ stock in your account to sell (minus 40% of the shares withhold for ordinary income taxes). Let’s say the share prices fluctuates a bit between 10/1 and 10/2 and you sell the shares at $25.15 per share or a gain of $9 total in short-term gains. That is much more palatable than selling a chunk of long-term held stock and taking a tax hit of $20,000.
Your Employee Stock Purchase Program (ESPP) is what we call the “souped up savings plan.” An ESPP is one of the most valuable ways to participate in the success of your company. It allows you to buy your company stock at a discount. In most cases, you can contribute anywhere between 2 percent and 15 percent of your salary, or up to $25,000 per year. Some companies sweeten the deal with what’s called a look back provision, which lets you choose to buy the company’s stock based on its closing price on the first day of the offering period or the last day of each purchase period —whichever is lower.
Some employees fail to tell their CPA that the stock sold on their 1099s were in fact Restricted Stock Units (RSUs) and taxes have already been withheld and are shown on the W-2 from the company. This can cause paying more and messing up on your taxes. As a result, employees often will often pay more taxes than they need to.
Some financial advisors will lure you in with the expertise in “complex” stock option strategies such as an “Exchange Fund” or “equity collar.” In our option, they are all expensive ways to delay the inevitable taxable event. There is nothing wrong with taking 10% off the table every year; particularly, in our current historically low tax environment.
You should always keep a spreadsheet of all your equity awards, when they are awarded, vested, sold, with dates and prices.
What if you retired and lived in Paradise, CA and lost your house and certificates to fire? There is absolutely no reason to keep paper certificates; they should be held in a brokerage account. If you would like to find out more about one or more of these points or discuss possible strategies to maximize your equity compensation, please let us know at info@credowm.com.
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Credo Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.
We’ve worked with many of the largest corporations in the Bay Area. We know the ins and outs of their programs and we’re happy to give you an objective opinion.
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