Amazon’s corporate compensation package includes restricted stock units (RSUs), which provide employees with an ownership stake in the company. RSUs, on the other hand, differ from stock options and restricted stock, particularly in terms of taxation. Let’s take a closer look at RSUs and how you may make the most of this component of your remuneration.
Here we look back at Amazon’s early days and highlight key achievements. We will also look into the company’s popularity.
History of Amazon
Jeff Bezos founded Amazon (or Amazon.com) in July 2005. He ran a Wall Street hedge fund at the time. Amazon is the world’s largest internet firm. Jeff Bezos believed that the only way to succeed online was to expand big and fast.
It now sells everything from books to shipping container homes. It is now a one-stop-shop with big plans for the future. In 1998, the company began selling computer games and music, as per Bezos’ initial business concept. Around the same time, Amazon bought additional online bookshops in the UK and Germany. Toys, games, and other things were added to Amazon’s product line around the turn of the millennium. Amazon Web Services was launched in the mid-2000s (AWS). This idea matched Bezos’ primary goal of making Amazon a tech firm rather than just an internet retailer.
Amazon Today: How far Amazon has come
The growth of Amazon reached heights in each upcoming year; By December 1996, the company had 182,000 customers. By October of the following year, about 1,000,000 accounts had been created. In 1997, revenues were around $148 million, up from around $16 million in 1996. Amazon had remained a private firm until now. But Bezos soon realized that sustaining expansion would require more than just private investment.
So, in 1997, Amazon.com went public, raising a staggering $54 million on the NASDAQ. The corporation might utilize the cash and stock sales to fuel its aggressive growth and acquisition plan. Amazon’s revenues topped $600 million in 1998. Amazon’s rapid rise made Bezos a household name. Time magazine named him Person of the Year for 1999. Amazon established its now successful Affiliate program about the same time.
Other companies joined the initiative to sell Amazon’s products on their own platforms. A win-win situation for both parties. Amazon recently became the second-ever $1 trillion market cap firm (Apple got there first, believe it or not). Due to political pressure, Amazon would report growth in 2020 after announcing and then scrapping plans for a second HQ in New York. Amazon and other internet vendors had a field day with many individuals stranded at home during the pandemic.
Amazon recently announced that CEO Jeff Bezos would step down in the fall of 2021. It remains to be seen how the company will perform without Bezos, but prior performance indicates it will be a huge success. That is, until the public calls for Amazon’s dissolution acquire substantial support. Time will tell.
Amazon Restricted Stock Units (RSU)
An Amazon RSU is entitled to receive a share or dividend at a future period or subject to some performance condition. Amazon grants it at the start of your employment. For reference, one RSU equals one share of stock once you become vested.
You acquire your shares upon being hired, but they aren’t worth anything just yet. You’ll be provided with a restricted stock vesting schedule that is proportional to your compensation. Your plan documentation gives you the exact number of RSUs you’ll receive and how you may earn more units.
What are restricted stock units?
The term restricted stock unit (RSU) refers to a type of compensation provided by an employer in the form of company stock to an employee. Restricted stock units are distributed to employees in accordance with a restricted stock vesting schedule and distribution schedule once they meet specified performance milestones or stay with their firm for a specified period of time.
RSUs provide employees with an ownership interest in the company but have no monetary value until vesting occurs. When the RSUs vest, they are awarded a fair market value (FMV). Once vested, they are treated as income, and a portion of the shares is deducted to pay income taxes. The remaining shares are transferred to the employee, who may sell them at his or her discretion.
Benefits of having restricted stock units
RSUs incentivize employees to stay with a firm for the long term and contribute to its success, increasing the value of their shares. If an employee elects to retain their shares until they receive their full vested allocation and the company’s stock increases in value, the employee receives the capital gain less the value of the shares withheld for income taxes and any capital gains taxes due.
Employers incur little administration costs because there are no physical shares to maintain and register. Additionally, RSUs enable a corporation to postpone issuing shares until the restricted stock vesting schedule is complete, deferring the dilution of its shares.
- Common tax situation and implication of RSUs – In comparison to other kinds of equity compensation, RSUs have a very clear tax treatment. Nonetheless, it is critical to comprehend and control it effectively. When you vest in RSUs, they are taxed as income. If you sell your shares promptly, you avoid capital gains tax and incur only income tax. However, if the shares are retained after the vesting date, any gain (or loss) is taxed as capital gain (or loss). RSUs are taxed the same as if you received a cash bonus (on the vesting date) and then used the cash to purchase your company’s stock.
- Understanding Amazon Restricted Stocks – As mentioned previously, Amazon Restricted Stock Units are a component of your pay, but they are worthless until you vest. However, once vested, you are free to do whatever you choose with the shares. Each unit is equal to the current market value of an Amazon share on the date of your vest. However, you incur a tax liability when you vest in Amazon RSUs. At that point, you’ll pay taxes on your usual income.
Additional information regarding Amazon RSUs includes the following:
- Ascertain that you understand how your RSUs may be affected if you take parental leave.
- Your RSUs are not subject to expiration.
- If you leave Amazon before reaching complete vesting, you will forfeit vesting.
- Once vested, you may have specified trading windows to avoid insider trading.
When and how many amazon employees receive RSUs?
Commencement of stock vesting will occur on your first anniversary. Additional vests will be issued at the conclusion of year two and every six months thereafter until you have worked for the company for four years.
As an Amazon employee, many employees obtain additional refresher RSUs over time. The following table details the vesting period for Amazon’s original grant. We will assume in this scenario that you received $600,000 in RSUs and that the stock price did not change.
- 5% of the initial award ($30,000) at the end of the first year
- Year two – 15% ($90,000)
- After six months – 20% ($120,00)
- End of third year 20% ($120,000) for a total of $240,000 in year three
- After six months – 20% ($120,000)
- Year four end – 20% ($120,000) for a total of $240,000 in year four
- Total value of your stock vests = $600,000
Vesting schedule of amazon RSUs
Most firms follow a 25-25-25 vesting schedule, so how much does Amazon offer restricted stock units?
Amazon RSUs follow a different pattern. Amazon operates on a timetable of 5-15-40-40. For instance, if you are promised 200 shares of Amazon, you would receive ten shares on the 15th of the month of your first anniversary, thirty shares on the 15th of the month of your second anniversary, 80 shares six months later, and the final 80 shares six months later.
How are Amazon RSUs taxed?
Amazon’s corporate compensation package includes restricted stock units (RSUs), which provide employees with an ownership stake in the company. RSUs, on the other hand, differ from stock options and restricted stock, particularly in terms of taxation.
Let’s take a closer look at RSUs and how they are taxed.
Understanding Amazon employee plan and benefits
Amazon offers competitive perks to all employees who work between 20 and 40 hours each week. While real Amazon employee stock benefits may differ according to job and negotiated remuneration, Amazon protects its employees’ financial well-being by offering competitive financial perks such as Amazon restricted stock unit (RSU) shares and a 401(k) plan.
- Amazon 401(k) Plan – If you choose a traditional 401(k), Amazon invests your money tax-free (before taxes). You now benefit from a reduced tax liability, which results in a little greater salary. When you withdraw contributions and profits during retirement, you owe taxes on them. You will be taxed according to your current tax bracket when you remove the funds.
Additionally, you can choose a Roth 401K, which allows for after-tax contributions. You pay regular income taxes on your paycheck, whereas 401K withdrawals are tax-free. Contributions and earnings in this account grow tax-free. You can withdraw the funds tax-free during retirement, as long as you wait until you reach the age of 59 ½ years.
While there is no assurance that the Amazon stock price will be higher when you vest, the odds are that it will still be a pleasant benefit that will help you financially in the future.
Tax implication of amazon RSUs
RSUs are taxed upon vesting, not exercise. This is a myth because stock options are only taxed when they are exercised. Amazon RSUs vest at 5% -15% -40% -40%, not the usual 25-25-25-25. The tax implications in years three and four often surprise Amazon employees. Corporations normally withhold 22% of RSU vesting, which may not be enough if the amount is large.
If this is the case, you may end up paying more taxes than expected. You can sell or hold your shares once they have vested. You’ll have to pay capital gains tax on the difference when you sell. If you keep RSUs for more than a year after receiving shares, the sale profits are subject to the long-term capital gains rate.
Tax treatment of restricted stock units
As you might expect, the tax treatment of RSUs can quickly become complicated, but it does not imply you are without options. When your vesting date arrives, you can:
- Sell for a profit – You may sell all of your shares and collect the cash if you like, or;
- Sell to offset taxes – This strategy involves selling enough shares to cover the withholding taxes on the value of the shares. The remainder of the proceeds is then invested in Amazon stock. When the shares are transferred to you, the price on the day of vesting will be used as the basis. This is vital information to keep in mind for future transactions.
To ensure that you are not surprised each April, a large sum (possibly up to 30% of the total amount) must be withheld for income taxes. Bear in mind that, as with any other type of compensation, the following may be due:
- Social Security contributions (6.2 percent )
- Contributions to Medicare (1.45 percent )
- Income taxes at the federal level (up to 37 percent depending on your marginal tax bracket)
- Income taxes imposed by states (depends on your state)
- To summarize, while you are watching the price of your RSUs vary, keep in mind that they are only worth approximately 65-75 percent of the listed value, as income taxes are almost always required upon vesting.
Market volatility and Amazon RSU
Your RSUs are directly linked to Amazon’s stock price. Obviously, if Amazon performs exceptionally well, you may see an increase in your compensation. However, if Amazon’s stock price does not perform as well, your overall pay may remain relatively flat or may decrease.
If you choose to retain your Amazon RSUs, it’s as if you’ve been awarded cash and have chosen to put every dollar in Amazon stock. While each case is unique, we normally advocate selling your RSUs immediately upon vesting. This eliminates the possibility of you amassing concentrated shares of Amazon stock in your portfolio, allowing you to diversify your holdings and protect them from market volatility and concentrated company risk.
The investment strategies to follow for Amazon employees
It is essential for Amazon employees to understand their compensation structure and to build an investment strategy. Compensation in the first two years of work is significantly different from compensation in years three, four, and beyond, which influences how you manage and invest your RSUs.
The above demonstration will help you in how to automate your investment year after year, assisting you in growing your retirement savings, reducing your concentrated stock risk, and increasing your short and intermediate-term saving goals.
Manage your Restricted stock units with Eqvista!
Hopefully, this has provided you with a comprehensive overview of your Restricted Stock Units (RSUs) and some ideas for maximizing their value. Each scenario is unique, so if you’re unsure what to do, please contact Eqvista to manage your Restricted stock units so we can explain your options in detail.