Equity compensation is no longer reserved for Silicon Valley startups or Fortune 500 CEOs. In North Carolina’s rapidly expanding tech, biotech, and financial sectors, especially in regions like Raleigh, Durham, Cary, Apex and beyond, your employer may offer Restricted Stock Units (RSUs), stock options, or both. Understanding the difference between these two types of compensation is essential if you want to make informed decisions about taxes, wealth building, and long-term planning.
At Tax Advisors of Cary, we provide concierge-level tax planning to high-earning professionals who want more than just annual tax filing. Our role is to help you integrate complex compensation into a strategic financial plan. If you’re comparing RSUs and stock options, or trying to decide how to approach an upcoming vesting or exercise window, this guide will help you understand the key factors.
What Are RSUs and Stock Options?
Both RSUs and stock options are forms of equity compensation, but they work very differently.
Restricted Stock Units (RSUs) are promises to deliver company shares at a future date, typically tied to a vesting schedule. You do not pay anything to receive RSUs. Once the shares vest, they are yours. At that point, their value is treated as ordinary income and included on your W-2. You can choose to hold or sell the shares after vesting.
Stock options, by contrast, give you the right to purchase company shares at a set price, known as the strike price, after they vest. You are not obligated to exercise them, and if the market value is below the strike price, they are effectively worthless. There are two primary types of stock options: Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). Each comes with different tax consequences, which we will explore in detail.
Tax Implications of RSUs
RSUs are relatively straightforward from a tax standpoint. When your RSUs vest, you owe ordinary income tax on the value of the shares as of the vesting date. That income is reported directly on your W-2, and most employers will withhold a portion of the shares or cash to cover taxes.
However, employers often use a flat federal withholding rate of 22 percent, which may not be sufficient if you are in a higher tax bracket. North Carolina also imposes a state income tax on the vested value. If your total income is high, you may be subject to underpayment penalties or find yourself with a significant tax bill when filing your return.
After vesting, any future gains or losses on the shares will be treated as capital gains or losses. If you sell immediately, there may be little or no capital gain. If you hold the stock and it appreciates, you will pay short-term or long-term capital gains tax depending on how long you own it.
Tax Implications of Stock Options
Stock options are more complex, but they offer greater flexibility.
If you receive NSOs, you will owe ordinary income tax at the time you exercise the options. The taxable income is based on the difference between the fair market value of the stock and the strike price. This amount is reported on your W-2. Any future gains after the exercise date will be subject to capital gains tax.
If you receive ISOs, the situation is a bit different. You do not owe regular income tax when you exercise ISOs, but the spread between the market value and strike price may trigger the Alternative Minimum Tax (AMT). If you hold the shares for at least one year after exercise and two years after the grant date, you may qualify for long-term capital gains treatment when you sell.
The advantage of ISOs is the potential to convert what would otherwise be ordinary income into capital gains, which are taxed at a lower rate. The disadvantage is the risk of AMT exposure and the need to plan carefully around timing.
Risk and Reward Profile
When choosing between RSUs and stock options, your personal risk tolerance and the outlook for your company matter a great deal.
RSUs are considered less risky because they always have value at vesting, assuming the company’s stock is worth something. You do not have to invest your own money to receive them, and you are not betting on the future price of the stock to unlock value.
Stock options, on the other hand, only have value if the company’s stock appreciates above the strike price. They are more speculative but offer higher upside. In the right circumstances, stock options can create significant wealth, especially if exercised and held under favorable tax conditions. However, they also come with the risk of expiring worthless if the stock does not perform well.
Cash Flow Considerations
RSUs are usually easier on your cash flow. There is no need to come up with capital to purchase the shares. Once they vest, you receive them and can sell them immediately or hold onto them. Taxes are handled through payroll, though not always fully covered.
Exercising stock options often requires you to pay the strike price out of pocket, plus taxes if applicable. This can be a substantial cash expense. For example, if you have the option to buy 5,000 shares at a strike price of $10 and the stock is currently worth $50, exercising would cost $50,000, and you would owe tax on the $200,000 spread. If you do not have sufficient liquidity, you may be forced to delay exercising or sell shares immediately after exercising, which could limit your ability to benefit from long-term capital gains treatment.
Long-Term Planning and Wealth Strategy
Equity compensation should be viewed as part of your larger financial plan. The decisions you make about RSUs and stock options affect not just your taxes, but also your investment strategy, estate plan, and retirement goals.
For example, we often help clients use charitable trusts, donor-advised funds, or gifting strategies to reduce the tax impact of equity events. Others may benefit from setting up a family trust or carefully timing stock sales to take advantage of low-income years, tax-loss harvesting, or other strategies.
Diversification is also a critical issue. Many professionals find themselves overexposed to their employer’s stock, particularly after multiple years of equity vesting. Selling shares strategically and reallocating into a broader portfolio can help manage risk and support long-term goals.
Choose With Strategy, Not Guesswork
At Tax Advisors of Cary, we understand that equity compensation is not just another line on your pay stub. It is a significant opportunity, and it comes with significant complexity. Whether you are receiving RSUs, stock options, or a combination of both, the right strategy can make the difference between maximizing your rewards and facing an unexpected tax bill.
Choosing between RSUs and stock options is not just about what sounds better on paper. It is about aligning your compensation with your financial goals, your tax position, and your long-term vision. We work with professionals across North Carolina to help them make confident, informed decisions that lead to better financial outcomes.
Deduct What You Can!
Effective tax planning goes beyond simply filling out forms; it’s about strategically managing your financial activities to maximize deductions and minimize liabilities. Engaging with a tax professional who understands your specific situation can make a significant difference. By staying informed about tax laws and taking advantage of available deductions, you can retain more of what you earn and achieve greater financial success.
Partner With Us Today!
Let us take the stress out of your taxes and help you keep more of what you earn. After all, your focus should be on your work, not on worrying about tax laws.
At Tax Advisors of Cary, we’re dedicated to helping you navigate complex filings, maximize deductions, and achieve your financial goals with confidence. Connect with us today to schedule an appointment and discover how our expert team can make tax season easier and more rewarding. Let’s work together for your success!
