Your Guide to Microsoft RSUs, ISOs and ESPP

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Microsoft offers its employees a generous compensation plan in addition to its standard salary. The benefits add to employees’ compensation, giving employees more options for saving for retirement, reducing tax liabilities, and investing in Microsoft itself.

Explaining Microsoft’s Incentive Rewards Offerings

Microsoft offers its employees a nice incentive rewards package. Employees receive RSUs as a part of their compensation package as well as an Employee Stock Purchase Plan, and generous 401K with matching contributions.

Level 67 and higher employees also have access to a deferred compensation plan which puts more money in employees’ pockets by deferring taxable income and lowering employees’ tax liability while still providing income for daily living.

Microsoft offers many ways for employees to contribute to their traditional retirement funds and invest in their future to ensure a financially secure retirement.

Things You Need to Know About Microsoft Restricted Stock Units (RSUs)

Microsoft offers its employees stock awards or Restricted Stock Units. This is a large part of the total compensation, and could even be used as annual income for employees that defer their taxable income (level 67 and above, more on this below) and lower their tax liability.

RSUs vest over time, but employees receive the RSUs upon being hired or as a bonus. When RSUs become vested, Fidelity (the plan sponsor) sells some of the taxes to take care of the taxes employees would owe on the new compensation.

Microsoft RSU vest four times a year. If employees strategize how they receive the stocks, they may use them to replace their salary, and instead invest their salary using the Microsoft Deferred Compensation Plan.

Microsoft Employee Stock Purchase Plan (ESPP)

Microsoft allows its employees to purchase stock at a 10 percent discount.This isn’t a tax-advantaged investment, so most employees use this benefit last. Since Microsoft offers RSUs as a part of its compensation plan, some employees may be too heavily invested in Microsoft, making the ESPP a minimal benefit, if any.

It’s important to talk to your financial advisor if you think you’re too heavily invested in Microsoft. Diversification is important, as is investing in the company you work for and believe in, but there’s such a thing as over-investing.

Related Article | When Should You Sell Your ESPP Shares?

Microsoft 401K

Microsoft matches up to 50 percent of contributions made up to the maximum allowance of $19,500. That’s $9,750 in free money from Microsoft, so it makes incredible sense for employees to max out their 401K contributions.

Microsoft employees may also use the Mega Backdoor Roth Conversion, which many are not aware of. This allows Microsoft employees to contribute more to their 401K, but the contributions are after-tax. These contributions convert to tax-free Roth investments each quarter. This increases the maximum 401K contributions by four and half times, setting Microsoft employees up for retirement.

In its traditional 401K account, Microsoft offers 22 options including target date funds, mutual funds, Microsoft stock, and the Brokerage Link option which provides access to thousands more mutual funds than traditional 401Ks offer. In other words, Microsoft employees have a lot more options than standard 401K plans offer.

Microsoft Deferred Compensation Plan

Level 67 and above employees are eligible for the Microsoft Deferred Compensation Plan. Like a 401K account, the funds contributed (or deferred) are pre-tax, so they reduce the taxable income for that year. Employees invest the funds in chosen mutual funds and the earnings grow tax-deferred.

Unlike a 401K, there is a distribution timeline employees must follow. Every time an employee makes a contribution, they must choose a payout period.

There are two important dates employees must know for the deferred compensation plan:

May 1 - 31 - Employees choose to defer next year’s cash bonus. They may defer up to 100% of the cash bonus.
November 1 - 30 - Employees choose the percentage of next year’s salary to be deducted from their paycheck

Even though it sounds like you're investing most of your salary, you can start cashing in your Microsoft Stock Awards for money to live off of as you become vested each quarter. It’s important that you talk to a financial advisor about your intended payout schedule and that you understand how it works before deferring your compensation since the payouts are more regimented than 401K payouts.

Microsoft Vesting Schedule

Microsoft rewards RSUs in August. Today’s new employees receive 5 percent of their RSUs every three months for five years. Older employees receive 10 percent of their RSUs every six months for five years.

Understanding Your Tax Impacts as a Microsoft Employee

Employees pay taxes each time their RSUs vest - so four times a year. Microsoft keeps a portion of the stocks issued, cashing them out to cover the tax liability. This doesn’t mean it covers the full liability, talk to your tax advisor about any tax implications of the RSUs in case you have a higher tax liability than you thought.

You pay taxes again when you sell the stocks. The profits become capital gains, but the length of time you held onto the stock matters. Your capital gains are the difference between the price you sell the stock for and the original vested price or the fair market value on the vesting date.

The longer you hold onto the stocks, the fewer taxes you pay. If you wait at least one year, you’ll pay long-term capital gains taxes which are lower than ordinary income tax brackets.

Microsoft Employees Enjoy Many Benefits

Microsoft takes care of its employees with many benefits. Understanding how they work, how they affect your tax liability, current and future income is important. Talking with a tax and/or financial advisor will help you choose the right structure for your compensation that decreases your tax liabilities and increases your future income as you near retirement.

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