How to Calculate the Value of Your RSUs

Restricted Stock Units (RSUs) are a common form of equity compensation granted by companies to their employees. These units represent a promise to deliver shares of company stock at a future date, provided certain conditions are met. Understanding how to calculate the value of your RSUs is important for personal financial planning and managing your compensation effectively. This guide will walk through the process of determining their value at various stages, from vesting to eventual sale.

Understanding RSU Vesting

Restricted Stock Units do not hold a determinable value until they vest, meaning an employee gains full ownership of the granted units. Vesting schedules outline when and how RSUs become available, varying significantly between companies. A common structure is time-based vesting, where a percentage of RSUs vests at regular intervals over a set period, such as 25% annually over four years.

Some plans include a “cliff vesting” period, an initial waiting period (often one year) during which no RSUs vest. After this cliff, a portion of the units may vest all at once, or a graded vesting schedule might begin. Performance-based vesting is another type, where units vest only upon the achievement of specific company or individual performance targets. The vesting date is when the shares become yours.

Calculating RSU Value at Vesting

The gross value of RSUs is determined on their vesting date. This calculation involves multiplying the number of vested shares by the market price per share on that date. For instance, if 100 shares vest and the market price is $50 per share, the gross value is $5,000. This market price is the fair market value (FMV) of the stock on the vesting date.

The company’s RSU plan rules specify how this market price is determined, which could be the closing price, an average of the high and low prices for the day, or a real-time price at the moment of vesting. This calculation yields the gross value before any deductions, such as taxes. This amount represents the compensation received at vesting.

Tax Implications on RSU Value

The gross value of vested RSUs is considered ordinary income for tax purposes. This income is subject to federal, state, and local income taxes, as well as payroll taxes like Social Security and Medicare. The fair market value of the vested shares is reported on your Form W-2 for the year in which they vest, similar to a cash bonus or regular wages.

Employers commonly use a “sell-to-cover” method to handle tax withholding. Under this approach, a portion of your newly vested shares is automatically sold to cover the required tax obligations, and the remaining shares are then deposited into your brokerage account. While a statutory withholding rate (e.g., 22% for federal income tax) is often applied, this might not cover your full tax liability, potentially requiring additional payments when you file your annual tax return. Alternatively, some plans allow for cash withholding, where you pay the tax liability from personal funds, allowing you to retain all vested shares.

Post-Vesting Share Value

Once RSUs have vested and taxes have been accounted for, the remaining shares become regular shares of company stock. At this point, their value will fluctuate with the broader market, just like any other publicly traded security. The fair market value of the shares on the vesting date, which was included in your ordinary income, establishes their “cost basis” for future capital gains or losses.

If you choose to hold these shares and later sell them, any difference between the sale price and this established cost basis will result in a capital gain or loss. If the shares are sold within one year of their vesting date, any profit is considered a short-term capital gain and is taxed at your ordinary income tax rates. However, if you hold the shares for more than one year after vesting before selling them, any profit is classified as a long-term capital gain, which typically qualifies for lower tax rates.