Key Points:
- Amazon offers equity compensation to employees in the form of Restricted Stock Units (RSUs).
- RSUs follow a 4-year vesting schedule: 5%, 15%, 40%, and 40% on each anniversary of the grant date.
- Upon vesting, RSUs are taxed as ordinary income at the employee’s marginal tax rate, with Amazon withholding shares to cover taxes.
- Employees can choose to sell vested RSUs to cover tax liabilities or hold onto them for future price appreciation.
- Amazon’s RSUs can be a valuable part of an employee's compensation, but understanding the tax implications and risks is crucial.
What Are RSUs?
RSUs, or Restricted Stock Units, are a type of equity compensation given by companies like Amazon. Unlike stock options, which require the employee to purchase shares at a specific price, RSUs are granted outright, vesting over time based on a schedule.
The key distinction is that employees do not need to "exercise" RSUs. Instead, they automatically receive shares once the vesting criteria are met. RSUs are taxed as ordinary income when they vest, not when they are sold. This means you will owe taxes based on the stock’s fair market value when it vests, regardless of whether you sell the shares immediately or hold them.
Amazon's RSU Vesting Schedule
Amazon has a unique RSU vesting schedule designed to encourage long-term employment. Over four years, Amazon employees receive shares according to this schedule:
- Year 1: 5% of RSUs vest at the end of the first year.
- Year 2: 15% of RSUs vest at the end of the second year.
- Year 3: 40% of RSUs vest at the end of the third year.
- Year 4: 40% of RSUs vest at the end of the fourth year.
This schedule is important to consider when comparing job offers. It helps Amazon retain top talent by spreading out stock benefits over time, making it a key part of total compensation.
How Are Amazon RSUs Taxed?
Taxation at Vesting: When RSUs vest, they are taxed as ordinary income based on the stock’s fair market value at that time. Amazon will typically withhold a portion of the shares to cover this tax liability.
Tax Treatment Upon Sale: When you sell your vested RSUs, any profit (the difference between the sale price and the vesting price) is subject to capital gains tax. If sold within a year, it is taxed as short-term capital gains, equivalent to ordinary income. If held for over a year, long-term capital gains rates apply, which are generally lower.
Double Taxation Concern: RSUs are often subject to what’s referred to as “double taxation.” First, you are taxed when the RSUs vest as ordinary income. Later, if you sell the shares for a profit, you pay capital gains tax on the increase in value from the vesting date to the sale date.
Benefits of Owning Amazon RSUs
Owning RSUs offers several potential benefits:
- Alignment with Shareholders: RSUs align employees’ interests with the company’s growth. As the company grows, so does the value of RSUs.
- Potential for Appreciation: If Amazon’s stock price rises over time, the value of vested RSUs increases, offering the potential for significant financial gain.
- Liquidity: Once RSUs vest, they can be sold on the open market, giving employees flexibility to cash out or hold onto them.
Risks of Owning Amazon RSUs
While RSUs can be valuable, they also come with risks:
- Stock Price Risk: If Amazon’s stock price falls, the value of RSUs drops. Employees may end up with less than anticipated, particularly if they sell after vesting at a lower price.
- Vesting Risk: If an employee leaves Amazon before RSUs vest, they forfeit the unvested shares.
- Double Taxation: RSUs are taxed twice—once at vesting as income and again as capital gains when sold, potentially creating a significant tax liability.
When to Seek Professional Financial Advice
If you’re receiving Amazon RSUs or have a complex financial situation, consulting with a financial planner can help you optimize your RSU benefits. Consider professional advice if:
- You earn over $200k or have complex financial goals.
- You need help managing tax implications of RSUs.
- You want to plan for long-term financial security using RSUs.
Conclusion
Amazon RSUs are a valuable part of your total compensation, offering the potential for financial growth. However, understanding the vesting schedule and taxation rules is essential to maximizing the benefit. Proper planning can help you avoid pitfalls and ensure you use your RSUs to support your financial goals.
Get expert advice from Progress Wealth Management to make the most of your Amazon RSUs.