4 MIN READ
Some companies offer equity compensation in addition to your regular salary. While it’s not cash compensation, it should count toward your compensation because you can turn it into an asset at the right time.
Some companies, like Trade Desk, offer compensation that includes employee stock options, incentive stock options, and restricted stock units.
Trade Desk Employee Stock Options
Employee stock options give you the ‘right’ to purchase stocks at a specified price. You have a specific time when you may execute the option to buy the stock.
For example, if you have the option to buy Trade Desk stock at $500 per share, it would make sense to execute it when the stock is valued higher than $500. If it’s valued at $520, per share, for example, you automatically make $20 per share purchased when you execute your option to buy.
As far as your taxes are concerned, you’ll report the difference between the stock’s fair market value and the exercised option price as ordinary income, paying income taxes on it. The amount is subject to tax withholding at the time you make the purchase.
Any earnings you make beyond this initial difference are taxed as capital gains, like any other stocks you may own.
Related Article | The Ultimate Guide on Equity Compensation and Taxation
Trade Desk Incentive Stock Options
Some companies offer incentive stock options as "incentives" to help the company grow. Incentive stock options are treated a little differently than employee stock options and are typically reserved for top management or high-performing employees.
Incentive stock options give employees the chance or option to buy a stock at a predetermined price, just like a regular stock option. However, ISO also has a more favorable tax advantage. If you keep the stock for at least one year past the exercise date and two years past the grant date (granting the option), you’ll pay only capital gains taxes on the profits rather than ordinary income tax on earned income.
Related Article | 8 Tips If You're Being Compensated With Incentive Stock Options (ISOs)
Trade Desk Restricted Stock Units
Some companies, in addition to regular compensation, offer restricted stock units. RSUs are a promise to issue stock after you meet specific restrictions (usually a specific amount of time working at the company).
RSUs are worth one share of stock for every unit. The units or stock shares don’t vest until you meet the service requirement.
For example, if you have a plan that pays 20 percent of your RSUs after 12 months of service, another 20 percent after 18 months, and 60 percent after 36 months and you were promised 100 RSUs, you’d earn the following:
- 20 RSUs after one year
- 20 RSUs after a year and a half
- 60 RSUs after three years
Taxes are automatically withheld at the time of issuance as they become a part of your taxable income. The RSU value is equal to the fair market value at the time it vests (not the issuance date since they are worth nothing at issue).
Related Article | When Should You Sell Your ESPP Shares?
Why Does Equity Compensation Matter?
Some companies, like Trade Desk, use equity compensation to lure in higher talents. Companies like Trade Desk want top talent, so they offer equity compensation in addition to the standard compensation.
Whether it is a regular form of your salary or they use it as a performance incentive, equity compensation can further your income whether regular or performance income.
It’s important to know the tax implications of your equity compensation, as it’s not all treated equally.
Related Article | 5 Things to Know About Your Restricted Stock Units
Ready to Understand your Equity Compensation?
The experts at MYRA can help you understand the tax implications and how the equity compensation works into your financial plan. Each plan offers different benefits and affects your compensation, net worth, and taxes differently. Reach out and let us help you with your financial plan.