How Microsoft RSUs Work for Employees
As a Microsoft employee, restricted stock units (RSUs) are likely a major part of your income. In this guide, we’re going to look at how RSUs work and how you can use yours to grow your wealth.
Key Takeaways
Microsoft employees receive RSUs as a major part of their compensation package.
Microsoft RSUs typically vest over a period of four to five years.
RSUs are taxed as ordinary income when they vest, with additional taxes potentially owed when the shares are sold, depending on the length of time they are held.
Unlike stock options, RSUs always have value when they vest as long as the company’s stock price is above zero, making them a lower-risk form of equity compensation.
What Are RSUs?
Restricted stock units (RSUs) are a common form of equity compensation for employees working in the tech industry. An RSU is essentially a promise of company stock later on. The company gives you the RSU, and over a certain amount of time (known as a vesting period), you gradually gain ownership of the company stock it represents. Once you own the stock, you can keep it or sell it for cash.
Unlike stock options, RSUs do not require you to purchase the stock yourself. Instead, the shares are awarded freely as compensation, making them a low-risk and valuable benefit. If the company’s stock price increases, the value of the RSU will grow. However, it will lose value if the company’s stock price falls. Either way, if you leave the company before your RSUs fully vest, you forfeit any unvested shares.
How Microsoft RSUs Work
Microsoft includes RSUs as part of its employee compensation packages. These RSUs play a key role in the income of workers at the company. Here’s how they work.
1. Receiving Microsoft RSUs
First, Microsoft will grant you an RSU promising a certain amount of shares. You don’t actually own the shares yet — this is still an IOU. The grant simply means you will receive shares later on, provided you meet the vesting conditions.
Microsoft grants RSUs at different points in your career:
On-hire stock awards: When you join Microsoft, you usually receive an RSU grant. This grant vests over four years, with 25% of the shares vesting each year.
Annual stock awards: Employees also receive stock grants as part of annual compensation reviews. These stock awards vest quarterly, with 20% vesting each year for five years. This means you receive a portion of the shares every quarter based on the company’s performance.
Special and leadership stock awards: Microsoft also grants special stock awards (SSAs) or leadership stock awards (LSAs) to high-performing employees or those in management roles. These awards often have a different vesting schedule than standard RSUs.
2. Vesting Period
The vesting period is how long you have to wait before fully owning the stock. Microsoft RSUs gradually vest over a period of four to five years, depending on how they were awarded to you (i.e., on-hire stock or annual.) As you gain ownership of this stock, it becomes taxable at the market price of the shares when they are vested.
3. Ownership
After the RSUs vest, the shares are deposited into your brokerage account. At this point, you can choose to either sell or hold them.
Sell: Many employees choose to sell their vested shares right away to avoid potential market fluctuations. By doing this, you secure the value of the stock at vesting, which has already been taxed as income.
Hold: You may also decide to hold onto the shares if you believe the stock price will rise in the future. If you hold the shares for over a year before selling, any additional gains are taxed at the long-term capital gains tax rate, which is typically lower than ordinary income tax.
How Microsoft RSUs Are Taxed
RSUs are taxed at two critical points: when they vest and when you sell them. Understanding these tax events is key to managing the tax implications of your RSU compensation and planning accordingly.
Taxation at Vesting
When your RSUs vest, the shares become taxable income. They are valued at the fair market price of the stock on the vesting date. This is treated as ordinary income and included in your total income for that year. This can push you into a higher tax bracket, resulting in a larger overall tax bill.
Microsoft automatically withholds a portion of the shares to cover these taxes — 22% if the stock is worth less than $1 million and 37% if it is worth more. However, this withholding tax may not be enough to cover your tax debt. In that case, you may have to pay additional taxes yourself.
In addition to the 22% (or 37%) withheld for income taxes, around 8% of the value of your shares will also be deducted for Social Security and Medicare taxes.
Taxation at Sale
The second taxable event occurs when you sell your vested shares. This is when capital gains taxes apply, depending on how long you’ve held the shares.
Short-term capital gains: If you sell your shares within one year of vesting, any profits (the difference between the sale price and the vesting price) are taxed as short-term capital gains. These are taxed at the same rate as ordinary income, which could mean a higher tax rate for you.
Long-term capital gains: If you hold your shares for more than one year before selling, any increase in value will be taxed at the lower long-term capital gains rate. In 2024, these rates range from 0% to 20%, depending on your income bracket. This can make it smart to hold the shares for at least a year if possible.
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Pros and Cons of Microsoft RSUs
RSUs have quite a few benefits, but they also come with potential risks. Understanding the pros and cons of Microsoft’s RSUs can help you make informed decisions with your equity in the company.
Benefits of Microsoft RSUs
Guaranteed value: Microsoft RSUs guarantee value as long as the company’s stock price is above $0 when they vest. This is unlike stock options, which can expire worthless if the stock price falls below the exercise price. With RSUs, you are granted shares at no cost to you, making it a lower-risk form of compensation compared to other types of stock-based awards.
No upfront investment: There’s no requirement to purchase the shares, and once the RSUs vest, you own them outright. This means you avoid the upfront costs often associated with stock options.
Simplicity: RSUs are simpler to manage compared to stock options or other complex forms of equity compensation. There is no exercise price, and you don't have to make decisions about when to purchase shares. Instead, shares are automatically granted to you at vesting. This simplicity reduces the risk of mismanagement and makes RSUs more accessible to employees unfamiliar with equity compensation structures.
Tied to Microsoft's success: RSUs are directly tied to Microsoft’s stock price. If Microsoft performs well, so do your RSUs. Fortunately, Microsoft’s stock has historically performed well, which makes RSUs an attractive part of employee compensation.
Vesting schedule: Microsoft offers flexibility with its vesting schedule. For example, annual RSUs vest quarterly over five years, and on-hire stock awards typically vest annually over four years. This staggered vesting allows employees to gain access to portions of their RSUs, providing steady financial benefits over time.
Possible Drawbacks of Microsoft RSUs
Taxed at vesting: The moment your RSUs vest, the value of the shares is taxed as ordinary income, even if you don't sell the shares right away. This means a portion of your shares will be sold to cover taxes (typically at a 22% federal tax withholding rate), and you may still owe additional taxes depending on your overall income and tax bracket.
Too much reliance on Microsoft: As an employee, it’s easy to become too dependent on Microsoft stock for your financial well-being, especially if your salary, bonuses, and retirement accounts are also tied to the company’s success. While it may feel rewarding to invest heavily in a company you work for, this creates a risk if the stock underperforms or if the company faces challenges. This makes it essential that you diversify your portfolio with other investments outside of Microsoft.
No voting rights until vesting: RSUs do not come with shareholder voting rights until they vest and are converted into actual shares. This means you have no say in corporate governance or decisions during the vesting period, unlike traditional shareholders.
Leaving Microsoft: One of the biggest risks with RSUs is that if you leave Microsoft before your RSUs fully vest, you forfeit any unvested shares. This can mean losing a significant chunk of your compensation.
Tips for Managing Your Microsoft RSUs Strategically
To maximize the potential of your equity in Microsoft, it pays to plan ahead. Here are some tips for making the most of your Microsoft RSUs.
Plan Around Your Vesting Schedule
Microsoft RSUs typically vest over a four- or five-year schedule. On-hire RSUs vest annually, while annual stock awards vest quarterly. Knowing your vesting dates is crucial for managing taxes, liquidity, and investment timing. If you’re planning a major life event (like buying a home or funding education) or considering a career change, coordinate your departure or sale of RSUs with your vesting schedule.
Plan for Taxes
When RSUs vest, their value is taxed as ordinary income, and Microsoft withholds 22% for federal taxes by default. Depending on your income level and tax bracket, this may not be enough to cover your full tax liability. Higher earners (those in the 32%, 35%, or 37% tax brackets) could owe significantly more at tax time. Be sure to keep enough money on hand to cover the additional tax debt.
PRO TIP: To avoid penalties or a large tax bill when you file, consider making quarterly estimated tax payments if your RSU vesting pushes you into a higher tax bracket. A fiduciary financial advisor can help you estimate your liability accurately.
Leverage Short- vs. Long-Term Capital Gains
If you sell your shares immediately after vesting, any gains are taxed on short-term capital gains rates, which means the gain is taxed as ordinary income. However, if you hold your shares for at least a year after vesting, you qualify for long-term capital gains tax rates, which are lower (ranging from 0% to 20%, depending on your income level).
If you need immediate liquidity for major expenses, selling RSUs as soon as they vest may be the best option. However, if you have flexibility and believe Microsoft’s stock will continue to rise, you may benefit from holding onto the shares to take advantage of future appreciation.
Diversify to Reduce Risk
While it’s tempting to hold onto your Microsoft shares, especially if the stock has performed well, over-concentrating in a single stock carries significant risk. If Microsoft’s stock price drops, having a large portion of your wealth tied to the company can hurt your overall financial picture. To mitigate this risk, consider selling some or all of your vested RSUs and reinvesting the proceeds in a diversified portfolio of stocks, bonds, and other asset classes.
Consider Charitable Contributions
Donating RSUs in a high-income year can help reduce your taxable income and support causes you care about. If you hold onto your RSUs and they increase in value, you can donate the appreciated shares to charity. By donating appreciated stock instead of cash, you avoid paying capital gains taxes on the appreciation and receive a charitable deduction for the full market value of the shares.
Incorporate RSUs into Your Retirement Planning
RSUs can play a critical role in building your retirement nest egg. Selling vested shares and using the proceeds to fund your 401(k) or IRA accounts can provide a steady flow of funds to grow your retirement accounts. For higher-level employees, consider using Microsoft’s Deferred Compensation Plan to delay receiving portions of your salary, allowing your RSUs to act as a cash-flow replacement.
Work with a Fiduciary Financial Advisor
Given the tax implications and market risks associated with RSUs, it’s wise to seek professional guidance. A fiduciary financial advisor can provide tailored advice on when to sell, how to manage your tax liabilities, and how to integrate your RSUs into your overall financial plan. Best of all, fiduciary advisors are legally obligated to act in your best interest, so you can rely on accurate, unbiased advice.
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Make the Most of Your Microsoft Benefits with Help from TrueWealth
Microsoft RSUs can be a powerful tool for growing your wealth. Of course, tech benefits are nothing if not complicated — especially when you factor in tax implications and investment options.
At TrueWealth Financial Partners, we can give you the support you need to make informed decisions about your future. Our team will create a custom plan that aligns with your financial goals so you can take full advantage of your benefits.
Schedule a free consultation today, and we’ll be happy to help you in any way we can. Let’s talk!
FAQs
Do all Microsoft employees get RSUs?
Yes, Microsoft provides RSUs as a significant part of their compensation packages for employees. New hires typically receive RSUs as part of their initial job offer, and employees may also receive RSUs through annual stock awards based on performance reviews. Special or leadership stock awards are also granted to high-performing or management-level employees.
Does Microsoft give grant refreshers?
Yes, Microsoft provides stock award refreshers. These are additional RSU grants given to employees periodically, typically after annual performance reviews in August. These refreshers can help retain employees and are based on individual performance or promotions.
Are RSUs better than stock options?
RSUs are generally considered better than stock options because they always have some value as long as the company’s stock price is above $0 at vesting. With stock options, employees must exercise them at a set price, and if the stock price falls below this level, the options could become worthless. RSUs, by contrast, do not require an upfront investment and are simpler to manage, making them attractive for employees who prefer guaranteed compensation tied to the company’s stock value.
How are RSUs taxed?
Microsoft RSUs are taxed at vesting and at sale. When RSUs vest, their market value is treated as ordinary income, subject to federal tax withholding (22% for most employees or 37% for higher-value grants), plus Social Security and Medicare taxes. If the shares are sold within a year of vesting, gains are taxed as short-term capital gains at the ordinary income rate. If held for over a year, gains qualify for long-term capital gains tax rates, which are generally lower.
Can I live off my Microsoft RSUs instead of relying on my salary?
Yes, it is possible to strategically use Microsoft RSUs for cash flow. Some employees choose to channel most of their salary into tax-advantaged accounts (like a 401(k)) and use RSUs as a primary source of liquid cash by selling them as they vest. This can be an effective strategy for those who want to optimize their tax situation and diversify away from holding too much company stock.
What happens to my RSUs if I leave Microsoft?
If you leave Microsoft before your RSUs fully vest, you forfeit any unvested shares. This is a significant factor to consider if you're planning to switch jobs, as those unvested RSUs will return to the company. However, in certain cases like retirement, disability, or death, the vesting schedule may accelerate or continue, depending on your specific plan agreement.
Do Microsoft RSUs give voting rights before they vest?
No, Microsoft RSUs do not grant any voting rights before they vest. You only gain shareholder voting rights once the RSUs have vested and you officially own the shares.
How is the value of my Microsoft RSUs determined?
The value of your RSUs is based on the fair market value (FMV) of Microsoft’s stock at the time they vest. This determines both the taxable income you report and the initial cost basis for the shares if you choose to sell them later. Changes in the stock’s value after the vesting date only impact the potential capital gains or losses if you decide to sell.
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