- Amazon offers equity compensation to its employees in the form of restricted stock units (RSUs).
- Amazon’s RSU vesting schedule is a 4-year vesting schedule, with 5%, 15%, 40%, and 40% of the RSUs vesting on each anniversary of the grant date.
- Upon vesting, Amazon’s RSUs are taxed as ordinary income at the employee’s marginal tax rate, with the company withholding a portion of the shares to cover the taxes owed.
- Employees may have the option to sell some or all of their vested RSUs to cover the taxes owed, or they may choose to hold onto the shares in the hopes of future price appreciation.
- Amazon’s RSUs can be a valuable component of an employee’s compensation package, but employees should carefully consider the tax implications and potential risks before accepting a job offer with equity compensation.
Amazon RSUs, or restricted stock units, are a type of equity compensation offered by Amazon. This type of compensation option is popular among tech startups that use it to attract and retain talent. For employees receiving RSUs through Amazon, understanding the vesting schedule and tax implications is essential. In this article, we will explore the vesting schedule for Amazon RSUs, as well as how they are taxed so you can make the most of your stock options. Let’s get started!
What are RSUs?
RSUs, or Restricted Stock Units, are a type of equity compensation offered by companies to their employees. They are similar to stock options in that they give employees the right to acquire shares of the company’s stock at a later date, but they are different in a few key ways.
One of the main differences between RSUs and stock options is that RSUs are not a contract that gives the holder the right to buy shares at a certain price (the “strike price”), but rather company stock is automatically transferred to the employee at a future date, subject to a vesting schedule. This means that the employee does not need to exercise the option to acquire the shares, and the shares are not subject to forfeiture if the employee leaves the company before the vesting period is over.
Another difference is that, unlike stock options, RSUs are taxed when they vest the same way that a cash bonus is, not when they are exercised. This means that the employee will owe taxes on the fair market value of the shares at the time they vest, regardless of whether they choose to sell the shares or not.
Some companies may also offer a “dividend equivalent right” on the RSU, in which an employee would get the right to receive a cash payment equal to dividends on the shares underlying the RSU, even if the shares are unvested.
Overall, RSUs can be a valuable form of compensation for employees, as they align the interests of employees with those of shareholders and provide a way for employees to benefit from the growth of the company’s stock price.
The Benefits Of Owning Restricted Stock Units (RSUs)
Owning RSUs can be beneficial for several reasons:
Alignment of interests: As mentioned earlier, RSUs align the interests of employees with those of shareholders, as employees are given a stake in the company’s success. This can help to motivate employees to work harder to help the company succeed, and can also make them feel more invested in the company’s success.
Potential for appreciation: If the company’s stock price increases over time, the value of an employee’s RSUs will also increase. This can provide employees with the opportunity to earn significant returns on their investment, particularly if they hold onto the shares for a long period of time.
Liquidity: Once the shares underlying the RSUs have vested, they can be sold on the open market, just like any other shares of stock. This can provide employees with the flexibility to cash in their investment if they need the money, or to hold onto the shares if they believe that the stock price will continue to increase.
Dividend Equivalent Right: Some companies may offer a “dividend equivalent right” on the RSU, in which an employee would get the right to receive a cash payment equal to dividends on the shares underlying the RSU, even if the shares are unvested. This gives the employee a cash flow stream in addition to the appreciation potential of the shares.
It’s worth noting that while RSUs can be a valuable form of compensation, they are subject to the volatility of the stock market. The value of the shares can decrease as well as increase. And also, the taxation at vesting can be significant, so employees should consider these points when considering the benefits of RSUs.
When & How Many Amazon Employees Receive RSUs?
The distribution of RSUs to Amazon employees can vary widely depending on the company’s policies and practices. Some companies may grant RSUs to all employees, while others may only grant them to certain groups of employees, such as executive or key management personnel. Amazon provides RSUs as part of their employee’s total compensation and to award them for reaching performance milestones (i.e. Stock awards). Oftentimes, new hires will be offered RSUs as part of their job offer which they won’t be able to sell until their amazon RSUs vest which will happen over the remaining four years following their grant date.
The number of RSUs granted to an Amazon employee can also vary. It may depend on factors such as an employee’s role within the company, their level of experience, and the company’s budget for equity compensation. Some companies may grant a certain number of RSUs to all employees, while others may tie the number of RSUs to an employee’s compensation or performance.
RSUs are always granted subject to a vesting schedule, which means that the employee must remain employed with the company for a certain period of time before they become eligible to receive the shares. This period is usually measured in years.
What is Amazon’s RSU Vesting Schedule?
Amazon RSUs have a unique vesting schedule where you’ll receive a portion of the shares every year following the initial grant.The thought behind it is to incentivize top talent to stay for at least 4 years.
The vesting schedule for Amazon RSUs is as follows:
Year 1: 5% of your RSUs vest at the end of the first year.
Year 2: 15% of your RSUs vest at the end of the second year.
Year 3: 40% of your RSUs vest at the end of the third year.
Year 4: 40% of your RSUs vest at the end of the fourth year.
This is important because if you intend on leaving Amazon or applying for a job there, you should compare apples to apples between offers. If Amazon has a more appealing (or less appealing) vesting plan, it’s important to consider this and take a closer look before accepting any one offer as you create your negotiation strategy because this is part of your total compensation.
How are Amazon RSUs taxed?
Amazon, like many publicly traded companies, issues Restricted Stock Units (RSUs) to its employees as a form of equity compensation. The taxation of RSUs can vary depending on the specific terms of the grant, the city, state, and the country where the employee is based. However, in the United States, the tax treatment of RSUs is generally as follows:
Taxation at vesting: The value of the shares underlying the RSUs is considered taxable compensation to the employee when the shares vest. This means that the employee will owe income taxes on the fair market value of the shares at the time they vest, regardless of whether they choose to sell the shares or not. This can create a significant tax liability for employees if the shares have appreciated significantly. In addition, the employee will owe social security, medicare, local taxes and medicaid taxes on the dollar value of the stock when the stock vests.
Tax treatment of sale: If the employee chooses to sell the shares, the difference between the sale price and the fair market value of the shares at the time of vesting is considered a capital gain or loss for tax purposes.
Withholding: When RSUs vest, Amazon will typically withhold a certain number of shares to cover the employee’s expected tax liability. This can be done by either withholding a cash amount, which employees can choose to cover with cash or shares, or withholding shares directly.
It’s worth noting that tax laws and regulations are subject to change and different countries might have different tax regulations and laws, so it’s always advisable to consult with a tax advisor to understand the specific tax implications of owning RSUs.
Employees should also be aware that if they hold the shares for less than a year after the vesting date, any gains made from the sale of the shares will be taxed as short-term capital gains which are taxed at the individual’s ordinary income tax rate. If the shares are held for more than a year, they will be taxed at the long-term capital gains rate, which is typically lower.
Amazon RSU Double Tax
RSUs are subject to what is often referred to as “double taxation” because the value of the shares is considered taxable compensation to the employee when the shares vest, and then again when the shares are sold.
When the shares vest, the employee must report the fair market value of the shares as income for tax purposes. The employee will owe income taxes on this amount, even if they choose not to sell the shares. This is referred to as the “taxation at vesting” or “ordinary income tax rate.”
If the employee chooses to sell the shares, any gain on the sale (the difference between the sale price and the fair market value at vesting) is subject to capital gains tax. So, the same income is taxed twice, once as ordinary income at vesting and then again as capital gain upon selling the shares.
It’s worth noting that not all country have double taxation for RSUs, for example, in some countries, the tax at vesting is only due when shares are sold, rather than when they vest. Also, the tax rate for capital gain can be different or lower than the ordinary income tax rate.
It’s important to consult with a tax advisor to understand the specific tax implications of owning RSUs and to plan accordingly. They can help in identifying strategies to minimize the impact of double taxation, such as by holding the shares for a longer period of time to qualify for long-term capital gains rates, or by selling shares in a tax-advantaged account, such as an IRA or 401(k).
Risks of owning Amazon RSUS
Owning RSUs can be a great way to align the interests of employees with those of shareholders, and to provide employees with the opportunity to benefit from the growth of the company’s stock price. However, there are also some risks associated with owning RSUs:
Stock price risk: The value of RSUs is directly tied to the performance of the company’s stock. If the stock price goes down, the value of the RSUs will also decrease, which can result in a loss of value for the employee. This risk is particularly acute for employees who sell their shares as soon as they vest, as they will be selling at a lower price than they could have received if the stock price had remained stable or risen.
Vesting risk: RSUs are typically subject to a vesting schedule, which means that the employee must remain employed with the company for a certain period of time before they become eligible to receive the shares. If the employee leaves the company before the shares vest, they will forfeit the shares and will not receive any value from them.
Company risk: The success of a company and its stock price are not only affected by the company’s performance but also by external factors such as the economy, industry trends, and even geopolitical events. These external factors can greatly impact the company’s stock price, and in turn, the value of an employee’s RSUs.
Double Taxation: RSUs are subject to what is often referred to as “double taxation” because the value of the shares is considered taxable compensation to the employee when the shares vest, and then again when the shares are sold, creating a significant tax liability for the employees.
Limited Liquidity: The vesting of RSUs is subject to the company policy and schedule, and employees have limited control over when they can sell the shares. Sometimes, this can mean that employees may be holding on to shares that they would like to sell, but are unable to due to the vesting schedule.
It’s important to consider these risks when deciding whether or not to accept RSUs as part of your compensation package. You may want to consult with a financial advisor or a tax professional to understand the potential risks and rewards of owning RSUs, and how they fit into your overall financial plan.
So, you have RSUs. When should you hire a financial planning firm to help and what should you look for?
Deciding when to hire a financial planning firm to help you manage your RSUs can depend on your individual financial situation and goals. If you’re one of the senior executives, earn over 200k, are a software engineer, or live in a less tax-friendly environment like mountain view, California; you could benefit from hiring a financial planning firm.
Here are a few situations where it might make sense to seek professional help:
- Complex financial situation: If you have a complex financial situation, such as multiple sources of income, multiple investments, or high net worth, a financial planning firm can help you to navigate the different tax implications of your RSUs and other investments, and develop a comprehensive financial plan that takes all of your assets and liabilities into account.
- Tax Reduction: Working with a financial planning firm such as Progress Wealth Management that provides in-house tax expertise can help you to ensure that your financial life is managed in a tax-efficient way.
- Difficulty understanding or managing your RSUs: If you are unsure about how to manage your RSUs or you’re having trouble understanding the tax implications of owning them, a financial planning firm can help you to better understand how RSUs fit into your overall financial plan and how to best manage them.
- Long-term planning: If you’re looking to hold on to your RSUs for the long term and want to use them as a part of your retirement planning, a financial planning firm can help you understand the long-term tax implications and provide guidance on how to best use your RSUs to achieve your retirement goals.
- Difficulty balancing risk: If you have difficulty balancing the risk of holding onto RSUs while trying to achieve your financial goals because oftentimes, the stock makes up a large percentage of your life savings. The importance of diversification cannot be overstated because all it would take to legitimately ruin your short and mid-term financial goals is the company stock falling hard and not recovering. A financial planning firm like Progress Wealth Management can help you make a sound decision based on your risk tolerance and your financial objectives and in doing so, ensure the performance of Amazon’s stock doesn’t determine your happiness and the affordability of your financial future.
- Life events: Life events such as marriage, children, or job loss can greatly affect your financial situation, a financial planning firm can help you to understand how these events will impact your finances and how to adjust your plan accordingly.
It’s important to remember that every person’s financial situation is unique, so it’s best to consult with a financial planning professional to understand if and when hiring one can be beneficial for your personal situation.
Amazon RSUs can be a great benefit for employees and can help them to save for their future. However, it is important to understand the vesting schedule as well as the tax implications associated with these stock units. By familiarizing yourself with both of these topics, you will be able to make informed decisions about your Amazon RSU benefits and take advantage of them in order to maximize your savings potential. With careful planning, Amazon RSUs can provide financial security that allows you to pursue your goals without worry or stress.