Stock options and restricted stock units (RSUs) are both forms of equity compensation offered by companies to their employees. While both types of equity compensation provide employees with a stake in the company's success, there are some key differences between the two.
According to Tax Planning Solutions, stock options give employees the right to purchase shares of the company's stock at a fixed price, known as the strike price. This means that if the stock price increases, the employee can purchase the shares at the lower strike price and then sell them at a higher price, making a profit. There are two main types of stock options: incentive stock options (ISO) and non-qualified stock options (NSO). ISOs are only available to employees and have favorable tax treatment, while NSOs can be granted to anyone and have less favorable tax treatment.
As a tax planning specialist with Tax Planning Solutions, Jason Kuennen explains that Restricted stock units (RSUs), on the other hand, are a type of equity compensation where an employee is awarded a certain number of shares of the company's stock, but with certain restrictions. These restrictions usually include a vesting period, during which the employee must remain employed with the company in order to receive the shares. Once the vesting period is over, the shares are transferred to the employee and become fully vested. Unlike stock options, RSUs do not have a strike price and the employee does not have the option to purchase the shares.
One of the main differences between stock options and RSUs is the way they are taxed. With stock options, the employee is taxed on the difference between the strike price and the fair market value of the stock at the time of exercise. This is known as the spread. With RSUs, the employee is taxed on the fair market value of the stock at the time it becomes vested. This means that with RSUs, the employee will be subject to ordinary income tax, while with stock options, the employee may be eligible for capital gains tax treatment.
Another difference between the two is that, with RSUs, the employee's equity stake in the company is more certain as the employee does not have to wait for the stock price to increase to make a profit. Stock options on the other hand, the value depends on the future performance of the company's stock. If the stock price does not increase, the options will not be worth anything and the employee will not be able to exercise them.
In conclusion, both stock options and RSUs are valuable forms of equity compensation that provide employees with a stake in the company's success. However, there are some key differences between the two. Stock options give employees the right to purchase shares of the company's stock at a fixed price, while RSUs are a type of equity compensation where an employee is awarded a certain number of shares of the company's stock with certain restrictions. Additionally, stock options are taxed differently than RSUs and are more common among private companies while RSUs are more common among public companies. It's always important to consult with a tax planning specialist such as Jason Kuennen of Tax Planning Solutions to understand the tax implications and the best way to handle your equity compensation.
