For many employees, getting company stock is a typical part of any compensation package. Whether through access to stock options or the promise of restricted stock units (RSUs), companies frequently offer up shares as an extra incentive to lure in a new prospective employee or retain a valuable one.

Restricted stock units differ from stock options in a few ways, but in general, they’re simpler to deal with, and thus their benefits can be more obvious. If you’ve been offered RSUs as part of your employee compensation package, you may have some questions, so let’s dig into the basics of what they are and how they work.

What Are RSUs?

Restricted stock units are shares of company stock given to an employee as compensation after a period of time. They’re offered in addition to regular salary and benefits and are essentially just another way for companies to pay their employees.

RSUs are handed out over what’s called a vesting schedule, which means that after a certain period of time (or sometimes when performance goals are met), some or all of the shares become available to the employee at fair market value. At that point, the employee is free to keep them and hope the stock increases in value or sell immediately.

Here’s an example of how they work: Let’s say you’re offered 500 shares of company stock over a vesting schedule of five years with 100 shares vesting every year over that period of time. That means for every year you work at the company over the next five years, you get 100 shares of stock that you can hang on to or sell. If you leave the company at any time before those five years are up (AKA before the stock is fully vested), you forfeit those remaining shares.

What Are the Benefits of RSUs?

There are a number of reasons why a company might offer RSUs, and there are some benefits for both the employee and the company.

For employees, you get additional compensation equal to the value of the shares–which you can “cash out” by selling or you can hang on to as an investment. Therefore, it’s in your best interest to stay with the company until your shares have fully vested and to work to improve the company and increase the stock price.

For the companies handing out RSUs, they get the benefit of locking down someone they view as a valuable employee for a set amount of time. Because RSUs are simply a promise to offer shares in the future, employees lose out on those shares if they leave the company before the stock has fully vested.

Sticking with our earlier example, if your company offers you 100 shares per year for the next five years, but you leave the company after just two years and seven months, then your company gets to keep the remaining 300 shares that haven’t yet vested. If you do stay with the company until the stock has vested, then they get to keep a valuable employee working to grow the company. It’s a win-win for both parties.

Also, because the shares vest over time, the company can delay the dilution of its shares by not releasing all its stock into the market at once. Finally, administration costs stay low, since there aren’t actual shares to track and record.

How Do RSUs Differ From Stock Options?

While on the surface they might sound like stock options, restricted stock units work a little differently. The key difference between the two is that when stock options vest, the employee has a right to purchase shares, usually at a discount. As soon as RSUs vest, the employee owns them outright with no further action needed.

Because you automatically own those company shares as soon as they vest, you don’t need to do anything to see the benefits–or the tax consequences–of your RSUs. The shares transferring automatically is one of the reasons why financial planning is so important, because you want to make sure the extra income from your stocks won’t push you into a higher tax bracket. With stock options, it’s something to keep an eye on, but you have a little more control over when you purchase the stock, as long as you stay within the option expiration date.

Additionally, RSUs can’t expire. Once again, this is due to the fact that once the stock units vest, you own those shares. The shares are automatically yours to keep or sell as you see fit.

How Are RSUs Taxed?

Taxing RSUs is very simple and isn’t subject to many of the often complex rules for taxing other forms of stock like non-qualified stock options (NSOs). Basically, once restricted stock units vest, they’re taxed as regular income.

Continuing with our previous example, you would be taxed every year for five years on the market value of those 100 shares of stock. If the value of the stock remains consistent at $60 per share, then you would have to pay income taxes (and FICA taxes) on the $6,000 market value of your shares–whether you immediately sell them or not.

However, companies are required to withhold taxes upon vesting, and this can be done three different ways: The first is called a same-day-sale, and this means you can elect to sell all the available shares the same day that they vest, and you would then receive cash after withholding. Option two is probably the most common, and in this scenario, you can sell just enough shares to cover withholding and keep the remaining shares. Finally, in option three, you would pay cash to your employer to cover the withholding and keep all vested shares.

Additionally, the withholding rate is different than the tax rate. RSUs are considered supplemental wages, so taxes are withheld at a flat rate of 22%–but that number jumps to 37% for income over $1 million. This means that you may owe additional taxes when you file.

What Should I Do with My RSUs Once They’ve Vested?

That’s totally up to you! When you’re offered restricted stock, there are no contracts, promises, or guarantees. It’s basically just a way for your employer to say you’re getting more money down the road.

Regardless of what happens to the value of the stock, once it vests, it’s yours, and you can do whatever you want with it. If your company’s stock is rising and its value is trending upward, hang on to your shares. You might be able to get more for them when you sell later on. If you want a quick payout, sell immediately.

Beyond whether or not to sell right away, there are other factors to think about. Maybe you don’t want to invest too heavily in your company. If a huge concentration of your savings is in your company’s stock, and you still rely on them for your salary and benefits, it might be a good idea to hedge your bets and diversify. Either way, it’s a good idea to consult a financial advisor to help ensure that whatever steps you take, you’re set up for a brighter future.