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How to Manage Your Amazon RSUs: A Guide for Employees

If you work for Amazon, chances are you receive a large portion of your total compensation in the form of Restricted Stock Units (RSUs). While RSUs can be a great way to grow your wealth, they also come with some financial planning challenges and opportunities.

What should you do with your RSUs once they vest? How do you sell them and how much are they worth? What happens to them if you leave Amazon? In this article, I’ll answer these questions and more to help you make smart decisions about your Amazon RSUs.

What are RSUs and how do Amazon RSUs work?

RSUs are a type of equity compensation that grants you the right to receive shares of your employer’s stock after meeting certain conditions. Typically, these conditions are based on your length of service or performance goals. Amazon’s RSUs are based on your length of service and follow a back-loaded vesting schedule. This means that most of your RSUs will not vest until your third and fourth years of employment. 

Here’s the vesting schedule for Amazon RSUs:

Year 1: 5% of RSUs vest on the first anniversary of your hire date

Year 2: 15% of RSUs vest on the second anniversary of your hire date

Year 3: 20% of RSUs vest 6 months later

Year 3: 20% of RSUs vest on the third anniversary of your hire date

Year 4: 20% of RSUs vest 6 months later

Year 4: 20% of RSUs vest on the fourth anniversary of your hire date

When your RSUs vest, you become the owner of your shares and you can sell them or hold onto them as an investment. However, there are some tax implications to consider when you receive or sell your RSUs. 

How are RSUs taxed at Amazon?

RSUs are taxed in two stages: when they vest and when you sell them. When your RSUs vest, they are considered ordinary income and subject to both federal income tax and payroll tax (Social Security and Medicare). The amount of income is based on the fair market value of the shares on the vesting date. For example, if 500 RSUs vest when Amazon’s share price is $100, your income is $50,000 ($100 x 500). You will pay taxes on this amount even if you don’t sell your shares.

Amazon automatically withholds 22% of your vested shares for tax. Continuing the example above, the Amazon employee with 500 shares vesting will have 110 shares that will go towards taxes (22% x 500), leaving the employee with 390 shares to sell or hold. Note that for high earners, 22% might be too low of a withholding rate and may result in additional taxes owed when they file. 

The second stage of RSU tax comes when you sell your vested shares. The sale will trigger a capital gain or loss that is either short-term or long-term depending on how long you hold the shares after the vesting date. Shares held less than one year will receive less favorable short-term capital gains tax treatment. 

If you sell your shares on the vesting date, the capital gain/loss is usually negligible so the only tax impact is the first stage of ordinary income recognized. 

Let’s pretend our hypothetical employee sold their 390 vested shares 3 months after they vested for $110 per share. The sale would result in a short-term capital gain of $3,900 (($110-100) x 390).

How to manage your Amazon RSUs

I recommend selling your Amazon shares as soon as your RSUs vest. From a planning perspective, your Amazon RSUs should be thought of as a cash bonus when they’re received. What’s the best use of that cash on the vesting date? Investing is a great option and you can use that cash for any investment available to you that you think best meets your goals and needs. Is investing in Amazon stock the optimal investment on that date? You already have significant exposure to Amazon for both future compensation and unvested RSUs so this is something I almost always advise against. 

Outside of investing your vested RSUs, there are a few other planning opportunities you could use the vested funds to help with:

  • Maximize your 401(K) contributions
  • Take advantage of the Amazon Mega Backdoor Roth
  • Beef up emergency savings/rainy day funds
  • Look to fund college savings accounts if you have children

What happens to your RSUs if you leave Amazon

If you leave Amazon before your RSUs vest, you’ll forfeit the unvested RSUs and lose any potential value. However, if you leave Amazon after your RSUs vest but before you sell them, you will retain the shares in your brokerage account and can hold them or sell them just like any other equity investment.  

If you have questions about your situation or want to discuss your Amazon RSUs, set up a free consultation with me.

Scott Caufield, CFA, CPA