If you work for Microsoft, chances are you receive a large portion of your total compensation in the form of Restricted Stock Units (RSUs). The higher your level at Microsoft, the greater RSUs will factor into your total compensation. 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 Microsoft? In this article, I’ll answer these questions and more to help you make smart decisions about your Microsoft RSUs.
What are RSUs and how do Microsoft 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.
On-hire RSU awards at Microsoft typically vest over 4 years. Employees receive 25% per year starting on the first anniversary of their hire date.
Annual stock awards are given out in August and have a 5-year vesting schedule (20% per year) that occurs quarterly. Those awards vest each February, May, August, and November and begin the first quarter after they are awarded.
Microsoft also offers leadership awards to higher-level employees which can have unique vesting characteristics.
When your RSUs vest, they show up in your brokerage account (such as Fidelity) and you become the owner of your shares. You have the choice to 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 Microsoft?
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 100 RSUs vest when Microsoft’s share price is $300, your income is $30,000 ($300 x 100). You will pay taxes on this amount even if you don’t sell your shares.
The automatic federal withholding rate for RSUs is 22%. Continuing the example above, the Microsoft employee with 100 shares vesting will have 22 shares that will go towards taxes (22% x 100), leaving the employee with 78 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 78 vested shares 3 months after they vested for $400 per share. The sale would result in a short-term capital gain of $7,800 (($400-300) x 78).
How to manage your Microsoft RSUs
I recommend selling your Microsoft shares as soon as your RSUs vest. From a planning perspective, your Microsoft 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 Microsoft stock the optimal investment on that date? You already have significant exposure to Microsoft 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 Microsoft Mega Backdoor Roth
- Maximize contributions to the Microsoft Employee Stock Purchase Plan (ESPP)
- Build emergency savings
- Look to fund college savings accounts if you have children
What happens to your RSUs if you leave Microsoft
If you leave Microsoft before your RSUs vest, you’ll forfeit the unvested RSUs and lose any potential value. However, if you leave Microsoft 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 Microsoft RSUs, set up a free consultation with me.
Scott Caufield, CFA, CPA