Do You Get Compensated With Stock From Your Employer? Beware This One Pitfall

Many people who work collect a salary and nothing more. But if you work for a company that's publicly traded, you may be entitled to shares of its stock as part of your compensation. 

To be clear, this isn't the same thing as having stock options, where you get the option to buy stock at a certain price. Rather, some companies actually open a brokerage account for their employees that they deposit shares of stock into regularly, sometimes monthly.

Now, getting some of your pay in the form of stock can be a good thing. That's because your shares could gain value over time. And if you're able to pay your bills on your salary alone and let your shares rise in value, you might end up with a large amount of money down the line. But getting paid in stocks could also backfire on you for one big reason.

When your portfolio becomes imbalanced

You'll commonly hear that your investment portfolio should contain a nice mix of assets. And if you're going to go heavy on stocks, it's important to diversify and load up on shares across a range of market segments. 

But if you're paid in the form of company stock and those shares keep coming in, what might happen in time is that those shares comprise a larger portion of your portfolio than what's healthy. And that could lead to an unfavorable situation if those shares then lose value.

Let's say that due to your company shares that keep coming in, 50% of your portfolio ends up being in a single company. If that company then misses expectations for earnings or suffers another negative event, the value of its shares could plunge, taking your portfolio down with it. 

As a general rule, you probably don't want a single stock to comprise more than 5% to 10% of your portfolio. So you'll need to keep tabs on the company stock you keep getting and make plans to unload some of those shares as it makes sense to do so.

Sell with a strategy

Because you don't want too much of your portfolio in just one stock, it's a good idea to sell some shares of company stock if you start to accumulate a large position there. But you'll need to be careful about when and how you sell those shares. 

If you sell stocks at a profit after holding them for a year or less, you'll be liable for short-term capital gains taxes. If you wait at least a year and a day before selling shares, you'll be bumped into the long-term capital gains tax category, which has you paying a much lower rate of tax on your profits.

When you go to sell your shares, it's important to see if your brokerage offers the option of FIFO, which is short for first in, first out. Using the FIFO method to sell your shares could help keep your tax burden to a minimum.

So for example, let's say that as part of your compensation, you get 10 shares of company stock monthly, and you got your first 10 shares on Jan. 1, 2023. You'll want to wait until at least Jan. 2, 2024 to sell those shares to avoid short-term capital gains. 

But you'll also need to make sure you're using the FIFO method to sell. What you don't want to do, for example, is sell the shares you received on Oct. 1, because then you'll be looking at short-term gains.

Getting paid with stock on top of cash can be a good thing. But be aware that it could lead to a less diversified portfolio, and plan around that by selling shares strategically once they start piling up.