In my two decades of working with tech professionals, I’ve seen the significant impact that equity compensation can have on financial success—but it’s often more complex than expected. Here are the top seven lessons I've learned while guiding clients through RSUs (Restricted Stock Units), stock options, and other equity compensation tools.

 

Lesson 1: Equity Compensation Is a Tool Not a Silver Bullet

 

Equity compensation, particularly RSUs, can be a powerful supplement to salary, bonuses, and overall compensation. Many tech professionals fail to maximize this tool during salary negotiations, which can be costly. For example, one client compared offers from multiple companies and negotiated higher total compensation by leveraging the equity offered by another. In Australia, your equity compensation forms part of your assessable income and should be considered when reviewing your overall tax and financial strategy.

 

Lesson 2: Be Aware of Tax Implications
 

Australian tax rules for equity compensation, including RSUs, often trigger tax events when the shares vest or are sold, not just when options are exercised. Many tech employees fail to realise that income tax may apply at vesting, especially with RSUs. In some cases, the tax rate can be higher if the shares are sold within a year of vesting, subjecting them to short-term capital gains tax. Knowing when to sell and calculating the tax due on both income and capital gains is crucial.

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Lesson 3: Have a Plan to Sell
 

One mistake I’ve seen tech professionals make is holding too much stock from their employer, especially after an IPO. It’s easy to become overly optimistic about a company's future, but it’s critical to diversify to mitigate risks. A disciplined plan to regularly sell shares, even in strong markets, can ensure you meet your financial goals without exposing yourself to unnecessary risk. In Australia, selling your shares held for more than 12 months provides a potential capital gains tax (CGT) discount of 50%, making it beneficial to hold onto them for longer when possible.

 

Lesson 4: Avoid the Wash Sale Rule
 

The Australian equivalent to the US "wash sale" rule involves selling shares at a loss and acquiring new ones within 30 days, disallowing the tax deduction for that loss. In practice, if you're receiving regular RSU vestings, this could make tax-loss harvesting difficult. To avoid complexities, it's important to track your share acquisitions and sales carefully, especially around key vesting dates.

 

Lesson 5: Watch Out for Tax Under-Withholding
 

In Australia, employers may not always withhold enough tax when your RSUs vest. You might be hit with a larger-than-expected tax bill at the end of the financial year, especially if your income pushes you into a higher tax bracket. To avoid surprises, it's worth calculating how much tax should be withheld and making additional payments if necessary. Setting aside a portion of your RSU income for taxes or paying estimated taxes can reduce stress come tax time.

 

Lesson 6: Watch Out for Unintended Tax Consequences
 

RSUs count as income, which can push you into a higher tax bracket and affect other aspects of your financial life. In Australia, for example, this could result in losing eligibility for certain tax offsets or pushing you above the limits for concessional superannuation contributions. Additionally, you may be subject to the Medicare levy surcharge, or in some cases, trigger Division 293 tax, which adds an additional tax burden on high-income earners.
 

Lesson 7: Consider Hiring a Professional
 

Equity compensation can be complex, particularly for those who are not familiar with tax rules or have multiple types of compensation like RSUs, ESPPs (Employee Share Purchase Plans), or stock options. I’ve found that many tech employees benefit from working with a financial adviser with experience in equity compensation. A professional can help manage tax liabilities, develop a selling strategy, and ensure that your compensation works efficiently within your broader financial plan. Having someone who understands tax laws and the nuances of equity compensation can save you thousands in the long run.

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In summary, equity compensation is a great tool, but it doesn’t come with a manual. If you are a tech professional , it’s essential to have a clear plan, both for your equity compensation and your overall financial strategy. If any of these lessons resonate with you, feel free to reach out for a chat.