By: AnnaMarie Mock, CFP®
As of July 30th, Amazon employs 1 million people in the United States. In other words, 1 in 169 workers are employed by Amazon and are only second to Walmart's 1.6 million employees.
Stock Awards as Employee Compensation
Companies like Amazon must remain competitive to retain top talent. A popular form of employee compensation is stock awards. Stock awards have been in use since the 1950s, but stock awards offered to lower-level employees, providing them with ownership in the company, have been less common but are gaining popularity.
Restricted Stock Units (RSUs)
At Amazon, depending on the job level and hours worked per week, an employee may be eligible to receive a grant of Restricted Stock Units, RSUs, and the opportunity to receive more grants over time. RSUs are stock-based compensation in the form of company shares.
All awards are governed by the restricted stock unit agreement, which can vary from company to company and even different iterations within the same company. This outlines to participants what the plan provides (i.e., restricted stock units) and how the program operates.
What essential information is in the agreement?
Number of units: The number of units granted is listed alongside the date of the grant when the employee is awarded the RSUs.
Vesting: Each stock award will be distributed based on a vesting schedule tied to performance milestones or a particular length of time. The vesting date is when the employee owns the shares and recognizes the market value as ordinary income. RSUs granted have no tangible value to the employee until the units vest, which at that point, the RSUs's value is the fair market value of the company stock.
For example, Amazon offers 4-year vesting with a 5%-15%-40%-40% structure. Say an employee of Amazon was granted 100 RSUs. The award will vest every year on the vesting date as follows:
If an Amazon employee receives additional RSUs over time, each award will be subject to a new vesting period.
Tax obligations: The RSUs will be included as ordinary income for tax filing in the year it vests. Using the example above, using 100 RSUs, the stock price of Amazon on the vesting date is $3,300. In reality, the stock price will fluctuate, but for simplicity's sake, I will assume the value of Amazon stock remains static over the 4-year vesting period.
The taxable income is included on the employee's W-2, which may come with a sizable tax bill. For example, in year 3, the taxable income from the RSUs alone is $132,000.
Dealing with Taxes Related to RSUs
The options to pay the taxes will be listed in the agreement. Sell-to-Cover is a popular method to ensure the appropriate amount of taxes have been withheld for federal and state taxes, if applicable. Shares of the company stock are sold to cover any ordinary income or employment taxes generated from the vesting. This may be preferred because it avoids paying taxes in cash and divests from additional concentrated employer stock.
One way to potentially minimize the tax bill on the vesting date is filing an 83(b) election within 30-days of when the employee initially receives the grant. This election may not be appropriate depending on the employee's financial situation or the company itself.
We help industries such as dental professionals, newly independent women, and pharmaceutical professionals do their financial planning. If you have any questions, please reach out to the HIGHLAND team.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.