How to Track Income from Stock Options and RSUs

Stock options and Restricted Stock Units (RSUs) are two popular forms of compensation that companies use to incentivize employees. While these forms of equity compensation can be highly lucrative, they can also be quite complex when it comes to tax implications and tracking the income generated from them. Unlike a traditional salary or wage, stock options and RSUs are linked to the company's stock performance, making them more volatile and harder to track.

In this comprehensive guide, we will explore how to track income from stock options and RSUs, how taxes impact these forms of compensation, and best practices for managing these income sources.

Understanding Stock Options and RSUs

Before diving into the specifics of tracking income, it's essential to understand what stock options and RSUs are, as well as how they differ.

A. Stock Options

A stock option gives an employee the right, but not the obligation, to buy company stock at a predetermined price (known as the "exercise price" or "strike price") within a specific time frame. There are two main types of stock options:

• Incentive Stock Options (ISOs): These are usually granted to employees and come with favorable tax treatment if certain conditions are met.
• Non-Qualified Stock Options (NSOs): These can be granted to employees, consultants, or directors, and are subject to regular income tax.

B. Restricted Stock Units (RSUs)

An RSU is a promise by the employer to grant shares of company stock at a future date, contingent on the employee meeting specific performance or time-based requirements. Unlike stock options, RSUs have value even if the stock price is lower than the grant price.

Tracking Income from Stock Options

A. When to Record Income from Stock Options

The timing of income recognition for stock options is crucial for proper tracking. The general rule of thumb is to track income at two critical stages:

1. When the options are exercised: When you exercise your stock options, you are purchasing the shares at the predetermined strike price. At this point, the difference between the strike price and the market value of the stock is considered income. If you're exercising non-qualified stock options (NSOs), the difference is subject to ordinary income tax.
2. When the options are sold: After exercising, if you sell the shares, any further profit or loss is subject to capital gains tax. The capital gain is calculated by subtracting the strike price and any taxes paid from the selling price.

B. How to Track Stock Options

1. Exercise Date Tracking

The first key date to record is when the options are exercised. You need to capture:

• The strike price (the price at which you bought the stock).
• The market price on the date of exercise.
• The number of shares exercised.

This will allow you to calculate the income generated from exercising the stock options.

2. Taxable Event for NSOs

For non-qualified stock options, the difference between the exercise price and the fair market value at the time of exercise is taxable as ordinary income. This will show up on your W-2 form as income. Make sure to track:

• The taxable income from the difference between exercise price and market value.
• Any withholdings for taxes made by your employer.

3. Sale of Stock

When you sell the stock you exercised, you need to track the selling price, the number of shares, and any commissions or fees. The capital gain is calculated as follows:

• Capital Gain = Selling Price - (Exercise Price + Taxes Paid)

Keep track of the holding period to determine if the gain is short-term or long-term. Short-term gains are taxed at ordinary income rates, while long-term gains are taxed at lower capital gains rates.

C. Tax Implications

• ISOs: If you meet certain requirements, you can benefit from favorable tax treatment, where the difference between the exercise price and the market price is not taxed as income when the option is exercised. However, it may be subject to the Alternative Minimum Tax (AMT).
• NSOs: The income from NSOs is taxed as ordinary income, and you will receive a W-2 form with the amount that was withheld for taxes.

D. Software Solutions for Tracking

Managing stock options manually can be challenging, especially when dealing with multiple exercises, sales, and complex tax rules. Here are some popular software tools designed to help employees track stock options:

• EquityZen: Tracks the performance of your stock options and helps in understanding the tax implications.
• Capshare: Provides tools for managing stock options, RSUs, and cap tables.
• Shareworks: A platform for managing equity compensation and calculating the tax impact.

Tracking Income from RSUs

A. When to Record Income from RSUs

RSUs are a bit simpler to track than stock options because they do not require you to exercise them. You will receive the shares once the vesting conditions are met. The income from RSUs is taxable as ordinary income at the time the RSUs vest, based on the fair market value of the shares on the vesting date.

B. How to Track RSUs

1. Vesting Date Tracking

For RSUs, the key event to record is the vesting date. On the vesting date:

• Record the number of shares vested.
• Record the market value of the shares at the time of vesting.
• The value of the vested shares is treated as ordinary income, and it will be reported on your W-2 form.

For example, if 100 RSUs vest and the market price of the stock is $50 per share on the vesting date, your taxable income is $5,000.

2. Taxable Event

The amount of taxable income generated from RSUs is the market value of the shares on the vesting date. Your employer may withhold taxes at this point, but if not, you'll need to track and pay the appropriate taxes on your own.

3. Sale of RSU Shares

Once your RSUs vest, you own the shares outright and can choose to sell them. The sale of these shares will result in a capital gain or loss, calculated by:

• Capital Gain = Selling Price - Vesting Price

If you sell the shares immediately after vesting, the capital gain is minimal, but if you hold the shares for a longer period, you may have significant capital gains, depending on the price movement.

C. Tax Implications

• Ordinary Income: The value of the RSUs at the time of vesting is treated as ordinary income and is subject to federal income tax, Social Security, and Medicare taxes.
• Capital Gains: After the shares are sold, any profit (or loss) from the sale will be subject to capital gains tax.

D. Software Solutions for Tracking RSUs

To streamline the process, many platforms help track RSUs. For example:

• RSU Tracker: Keeps track of vesting schedules, tax liabilities, and stock performance.
• Equity Edge Online: Helps you track RSUs and provides tax impact estimates.

Best Practices for Managing Stock Options and RSUs

Tracking stock options and RSUs requires careful organization and attention to detail. Below are some best practices that can help you stay on top of these complex forms of income:

A. Create a Tracking System

Whether you use spreadsheets, a financial planner, or software tools, creating a system to track your stock options and RSUs is essential. Ensure your system includes the following details for each option or RSU grant:

• Grant date
• Number of options or RSUs granted
• Strike price (for options)
• Vesting schedule
• Tax withholdings
• Exercise or sale dates

B. Understand Tax Implications

Understanding the tax treatment of stock options and RSUs will help you plan your income and tax liabilities. Work with a tax advisor to ensure you're prepared for the tax consequences of exercising stock options or selling RSU shares.

C. Plan for Taxes

If taxes are withheld automatically when your RSUs vest, make sure to confirm the amounts. If you're holding onto stock options or RSUs that haven't yet vested, consider setting aside funds in a tax-deferred account or investment vehicle to cover the taxes due when those options or RSUs vest.

D. Review Your Equity Compensation Annually

Equity compensation can change from year to year, especially in companies that offer multiple grants. Review your stock options and RSU holdings annually to determine if adjustments to your tracking system are necessary. This also allows you to plan ahead for potential tax liabilities.

Conclusion

Tracking income from stock options and RSUs is a multifaceted process that requires careful attention to timing, tax implications, and personal financial goals. By understanding the key events that trigger taxable income---such as exercising stock options and the vesting of RSUs---you can ensure that you are properly tracking and managing your equity compensation.

Incorporating software tools or keeping detailed records in a spreadsheet can help simplify the tracking process. At the same time, working closely with a tax advisor can ensure you stay compliant and avoid any surprises during tax season.

Ultimately, proper tracking of stock options and RSUs can maximize the value of your compensation package while minimizing the potential for tax issues or missed opportunities.

View Product