Microsoft

Compensation and Benefits at Microsoft

Compensation at Microsoft consists of Salary, Bonus, and equity compensation in the form of RSUs. For a level 59 Software Engineer, the base salary makes up about 70% of total compensation. In comparison, a level 67 Principle SDE base salary would only be expected to make up around 50% of total comp, with the variable bonus and RSU income making up the rest.

Some key considerations and opportunities with each type of income are:

Salary: Financial planning opportunities with your pay are to max out your 401(k) and HSA accounts to reduce your taxable income. Those level 67 or higher can also defer their salary to the Microsoft DCP to reduce the current tax bill. Additionally, you can contribute up to 15% of your salary to the Microsoft ESPP and get a 10% discount on the shares.

Bonus: Bonus income at Microsoft can range between 0-40% of base pay and is paid annually in September. Bonus income is eligible to be deferred in the Microsoft DCP.

RSUs: RSUs at Microsoft vest quarterly. For savvy Microsoft employees, this additional cash flow can be combined with other benefits (like the Mega Backdoor Roth 401k or charitable giving) to maximize your financial wealth.

Planning opportunities with RSUs include using RSU income to maximize contributions to other benefits programs and incorporating tax planning with your RSU vesting schedule to minimize taxes.

Are you looking for more? Read our article How Does Microsoft Compensation Work?

The Microsoft 401(k)

Microsoft has an excellent 401(k) plan for its employees and a generous match. In order to maximize the value you get from it, focus on three key things:

1) Maximizing the value of Microsoft’s match — Microsoft will match 50% of all contributions up to the IRS contribution limit for 2022 of $20,500. That means Microsoft will add $10,250 to the account for those maximizing their contributions. Getting the entire match is like a nearly 7% raise on a $150,000 salary!

2) Reducing your tax bill — Next, money added to the traditional 401(k) goes in pre-tax, which reduces your taxable income today. Maxing out your Microsoft 401(k) saves you over $7k in taxes at the 35% federal tax bracket!

3) Making smart investment decisions in the account — The Microsoft 401(k) plan offers a variety of investment options and asset classes with a lineup of investment options from top money managers, including Blackrock, Vanguard, PIMCO, and DFA.

To take advantage of these options, you’ll want to assess the following factors:

• Decide on your asset allocation
• Will you use active or index funds
• Minimize your fund expenses
• Analyze and monitor your fund performance

To learn more about the Microsoft 401(k), see our full article Microsoft’s 401(k) Retirement Plan Details.

Microsoft Mega Backdoor Roth 401(k)

The Mega Backdoor Roth 401(k) is a feature inside your 401(k) at Microsoft that gives you a way to supercharge tax-advantaged retirement savings.

Your contributions to a traditional 401(k) are capped at $20,500 for 2022, but with the Mega Roth at Microsoft, you can now save an additional $30,250 after tax.

This money goes in on an after-tax basis, meaning that while you receive no tax break today for these contributions, the money will grow without being taxed, and notably, at retirement, the funds can be accessed tax-free.

A summary of the highlights of this account are:

• After your 401(k) contributions, this account allows you to contribute another $30,250 at Microsoft
• The growth of the account is shielded from taxes while you are working
• At retirement, the money can be accessed tax-free

For more about how the account works, how you can participate, and how to incorporate it into your wealth strategy, see our full article, Microsoft 401k Mega Backdoor Roth Conversion: How it Works.

RSUs at Microsoft

RSUs at Microsoft make up a significant portion of your pay—anywhere from 20-40% or higher. RSUs at Microsoft, like any employer, are taxed as ordinary income as they vest based on the stock price at the vesting date.

RSUs at Microsoft vest every quarter over four years for “On-Hire” awards and five years for “Annual stock” awards.

Your Microsoft RSUs are taxed as follows:

1. 1. As ordinary income to you in the year, they vest.
   2. If you sell your shares immediately, there is no capital gain tax, and you only pay ordinary income taxes.
   3. If the shares are held beyond the vesting date, any gain (or loss) is taxed as a capital gain (or loss).

For more about how RSUs work, are taxed, and some tax-saving strategies, see our full article, the Full Guide to Microsoft RSUs.

Deferred Comp at Microsoft

Deferred Compensation at Microsoft is available for those level 67 or higher. And for these employees, the Microsoft DCP is one of the most powerful tools available to reduce taxes and build wealth.

Participating in the DCP reduces your taxable income (and, therefore, your tax bill!) in the year the income is deferred. This can be invested and grow tax-free until it's distributed back to you according to the distribution schedule you elect during your enrollment window.

At distribution, the income is taxed as ordinary income.

At Microsoft, employees can defer the following:

• Salary: 0–75% of base salary (in 1% increments). The enrollment window is open in November for the following calendar year.
• Bonus: 0–100% of annual bonus or Executive Incentive Program cash award (in 1% increments). The enrollment window is open in May for the yearly bonus period from July 1^st – June 30^th.
• New Hire Deferrals: New hires can also elect to defer up to 90% of certain compensation if this election is made before their hire date.

There are four main questions you should ask before enrolling in the plan:

1. 1. How much risk is in the plan?
   2. What’s the tax benefit to you?
   3. How much should you defer?
   4. What distribution schedule should you elect?

For more help answering these questions about Microsoft’s DCP plan, see our full article, the Microsoft Deferred Compensation Plan (DCP): Enrollment Guide.

 

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This information is supplied from sources we believe to be reliable. However, this information is subject to change without notice, and we cannot guarantee its accuracy. Please reach out to your benefits department for the most up-to-date information. Cordant is not affiliated with Microsoft.