This is the second in a four-part series about your paystub – what the various deductions mean, why you need to pay attention to them, tips on not having too much or too little deducted, and how to use all that information in your financial planning. Our focus in part two is the stock and RSU offset on your paystub plus other equity comp items on your paycheck.
In Part 1 I talked about the basic deductions that appear on most people’s paystub.
In Part 2 I’ll cover some deductions that are specific to people with stock options and RSU. If you’re in the tech industry, chances are your employer has made stock options, in one form or another, a part of your total compensation plan. These come with their own set of pay stub notations that deserve some explaining.
Stock options typically come in three flavors: Incentive Stock Options (ISOs), Nonqualified Stock Options (NSO or NQ), or Restricted Stock Units (RSU). Your employer may also have an Employee Stock Purchase Plan (ESPP). If you need a refresher on the various types of stock options, check out Landon Loveall’s article, RSU vs Stock Options: Key Differences in an IPO or RSU Strategies for Tech Professionals.
Here are the stock and RSU offset codes and others you may see on your pay stub plus what each means.
Stock and RSU Offset
In the deductions section you may see Stock and RSU Offset or some variation NQ Offset, ESPP Offset, ISO Offset. These are accounting deductions to recognize that you are not receiving cash in a direct deposit from these transactions. You received the net shares in your brokerage account. The paystub simply reports the income that will end up on your W-2.
Dsq Disp
Dsq Disp is short for Disqualifying disposition and refers to selling ISO or ESPP shares before satisfying the long-term capital gain holding period. The gain on the sale of these shares appears in the earnings section in order to be taxed.
Bonus Tip – Watch out for double taxation. If Dsq Disp is on your paystub, you could end up with the same income reported on BOTH your W-2 and 1099-B. Not to worry. A skilled tax preparer will know how to report missing cost basis or adjust cost basis to account for W-2 income that gets duplicated on a 1099-B
NQ Stk Options
NQ Stk options are non-qualified stock options. Income from NQs is the difference between the value of the stock and your exercise price on the date you exercise. You are taxed on this amount at the time you exercise NQs whether you sell the shares or hold them.
Note – Nonqualified stock options require mandatory withholding that must be paid at exercise. This is often done through a sell to cover arrangement just like RSU. Continue reading to learn more.
RSU Stock Income
RSU stock income will appear on your pay stub on the date the RSU settle. The amount is the value of the stock times the number of shares on the vesting date. Your employer will sell some of the RSU at the time of vesting and apply the amount sold to income and payroll taxes. The amount of income tax withheld is included on the Federal income tax deductions line and the CA income tax deduction line.
NOTE: Your employer may withhold at a lower tax bracket than you are in for both nonqualified stock options and RSU. Here’s where you need to pay attention, so you don’t get into trouble by NOT withholding enough and having to pay additional tax when you file your return.
Stock options and RSU can be an advantage in helping you build wealth and reach your financial goals…if you manage the timing and relevant tax obligations correctly.
That’s where we come in. Give us a call and let’s get planning.
