Equity compensation, including restricted stock units (RSUs), stock options, and employee stock purchase plans, can be a valuable part of your total compensation. But it can also create complicated decisions and unexpected tax consequences. Let’s dive into why and how understanding equity compensation is crucial to your financial health.

The first step is understanding exactly what you own. Important details include when your awards vest, when options expire, what taxes may be triggered, and when you can sell the shares. Tax treatment varies by award type and transaction; for example, some stock-option income may be treated as wages, while a later sale may create a capital gain or loss. The IRS provides an overview of these distinctions.

Equity compensation should be viewed alongside your salary, bonus, benefits, and other income, not as a separate financial windfall. At the same time, unvested awards and future stock values are not guaranteed, so building a plan around money you have not yet received can sometimes leave you overextended. This is why its important to work with a financial professional to build a financial plan that accounts for all the complexities that come with equity compensation.

Holding too much company stock can also create concentration risk, meaning that your paycheck and a significant portion of your wealth may depend on the same company. A thoughtful strategy and global diversification strategy can help you decide when to exercise options, sell shares, diversify, and set aside money for taxes.

Working with a financial advisor can help you understand what you own, coordinate decisions with your broader financial plan, and avoid making choices based solely on your company’s stock price. Your advisor can also work with your tax professional to help you prepare for the tax impact before, not after, a transaction occurs. Equity compensation can be a powerful wealth-building tool, but most powerful when it is managed with a clear plan. Have questions about your equity compensation and how it fits into your overall financial roadmap? Schedule a call here or email us at info@shermanwealth.com to learn more.