Restricted stock and RSUs are taxed differently than other kinds of stock options, such as statutory or non-statutory employee stock purchase plans (ESPPs). Those plans generally have tax consequences at the date of exercise or sale, whereas restricted stock usually becomes taxable upon the completion of the vesting schedule.
This occurs when the grant vests after specified targets are reached and shares are either delivered or paid out to you. Depending on the structure of the grant, this may occur in the year after the end of the performance period Form and Sch. You need to complete Form and Schedule D for the year when you sold your stock and file them with your Form federal income-tax return.
You do this even if Is the original vesting schedule ever accelerated by reaching performance milestones or special goals? Some companies accelerate the vesting schedule of restricted stock or RSUs if Does a grant of restricted stock or performance shares have an expiration date, as stock options do?
Not for standard time-vested restricted stock. These grants do not have a term, as stock options do. The vesting of restricted stock depends on Do I get dividends with performance share awards?
How are they taxed? Dividend rights are not mandatory. When a company pays dividends on outstanding shares of stock, it can also With restricted stock units and performance shares, can I defer the delivery of the shares at vesting? How is this taxed? The ability to delay the delivery of RSU shares and thus ordinary income taxes at vesting depends on whether your company has a provision for this in its stock plan.
The deferral needs to be structured correctly, as otherwise it can lead to tax penalties. What would happen to my performance shares in an acquisition of my company? For a change in control e. Commonly, performance share plans Do surveys show trends? Stock plans can be global, and in some countries they are more popular than they are in the United States.
Consulting firms and other groups have conducted surveys about the use of stock compensation in both developed and emerging economies How common are premium, performance-based, and indexed stock options?
These unusual types of stock options, which are tied to company performance more closely than plain-vanilla options, are typically granted to Can restricted stock and performance shares go underwater? When employees are awarded restricted stock, they have the right to make what is called a "Section 83 b " election.
If they make the election, they are taxed at ordinary income tax rates on the "bargain element" of the award at the time of grant. If the shares were simply granted to the employee, then the bargain element is their full value. If some consideration is paid, then the tax is based on the difference between what is paid and the fair market value at the time of the grant. If full price is paid, there is no tax.
Any future change in the value of the shares between the filing and the sale is then taxed as capital gain or loss, not ordinary income. An employee who does not make an 83 b election must pay ordinary income taxes on the difference between the amount paid for the shares and their fair market value when the restrictions lapse.
Subsequent changes in value are capital gains or losses. Recipients of RSUs are not allowed to make Section 83 b elections. The employer gets a tax deduction only for amounts on which employees must pay income taxes, regardless of whether a Section 83 b election is made. A Section 83 b election carries some risk. If the employee makes the election and pays tax, but the restrictions never lapse, the employee does not get the taxes paid refunded, nor does the employee get the shares.
Restricted stock accounting parallels option accounting in most respects. If the only restriction is time-based vesting, companies account for restricted stock by first determining the total compensation cost at the time the award is made. However, no option pricing model is used. If the employee buys the shares at fair value, no charge is recorded; if there is a discount, that counts as a cost.
The cost is then amortized over the period of vesting until the restrictions lapse. Because the accounting is based on the initial cost, companies with low share prices will find that a vesting requirement for the award means their accounting expense will be very low. If vesting is contingent on performance, then the company estimates when the performance goal is likely to be achieved and recognizes the expense over the expected vesting period.
If the performance condition is not based on stock price movements, the amount recognized is adjusted for awards that are not expected to vest or that never do vest; if it is based on stock price movements, it is not adjusted to reflect awards that aren't expected to or don't vest. Restricted stock is not subject to the new deferred compensation plan rules, but RSUs are. Both essentially are bonus plans that grant not stock but rather the right to receive an award based on the value of the company's stock, hence the terms "appreciation rights" and "phantom.
Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time. SARs may not have a specific settlement date; like options, the employees may have flexibility in when to choose to exercise the SAR. Phantom stock may offer dividend equivalent payments; SARs would not. When the payout is made, the value of the award is taxed as ordinary income to the employee and is deductible to the employer.
Some phantom plans condition the receipt of the award on meeting certain objectives, such as sales, profits, or other targets. These plans often refer to their phantom stock as "performance units.
Careful plan structuring can avoid this problem. Because SARs and phantom plans are essentially cash bonuses, companies need to figure out how to pay for them. Even if awards are paid out in shares, employees will want to sell the shares, at least in sufficient amounts to pay their taxes.
Does the company just make a promise to pay, or does it really put aside the funds? If the award is paid in stock, is there a market for the stock? If it is only a promise, will employees believe the benefit is as phantom as the stock? If it is in real funds set aside for this purpose, the company will be putting after-tax dollars aside and not in the business.
Many small, growth-oriented companies cannot afford to do this. The fund can also be subject to excess accumulated earnings tax. On the other hand, if employees are given shares, the shares can be paid for by capital markets if the company goes public or by acquirers if the company is sold. Phantom stock and cash-settled SARs are subject to liability accounting, meaning the accounting costs associated with them are not settled until they pay out or expire.
For cash-settled SARs, the compensation expense for awards is estimated each quarter using an option-pricing model then trued-up when the SAR is settled; for phantom stock, the underlying value is calculated each quarter and trued-up through the final settlement date. Phantom stock is treated in the same way as deferred cash compensation. In contrast, if a SAR is settled in stock, then the accounting is the same as for an option.
The company must record the fair value of the award at grant and recognize expense ratably over the expected service period. If the award is performance-vested, the company must estimate how long it will take to meet the goal.
If the performance measurement is tied to the company's stock price, it must use an option-pricing model to determine when and if the goal will be met. Employee Stock Purchase Plans ESPPs Employee stock purchase plans ESPPs are formal plans to allow employees to set aside money over a period of time called an offering period , usually out of taxable payroll deductions, to purchase stock at the end of the offering period.
Plans can be qualified under Section of the Internal Revenue Code or non-qualified. For restricted stock plans, the entire amount of the vested stock must be counted as ordinary income in the year of vesting. The amount that must be declared is determined by subtracting the original purchase or exercise price of the stock which may be zero from the fair market value of the stock as of the date that the stock becomes fully vested. The difference must be reported by the shareholder as ordinary income.
However, if the shareholder does not sell the stock at vesting and sells it at a later time, any difference between the sale price and the fair market value on the date of vesting is reported as a capital gain or loss. Shareholders of restricted stock are allowed to report the fair market value of their shares as ordinary income on the date that they are granted, instead of when they become vested, if they so desire. The capital gains treatment still applies, but it begins at the time of grant.
This election can greatly reduce the amount of taxes that are paid upon the plan, because the stock price at the time the shares are granted is often much lower than at the time of vesting. The strategy can be especially useful when longer periods of time exist between when shares are granted and when they vest five years or more. They each receive restricted stock grants of 10, shares for zero dollars.
John decides to declare the stock at vesting while Frank elects for Section 83 b treatment. Therefore, Frank pays a lower rate on the majority of his stock proceeds, while John must pay the highest rate possible on the entire amount of gain realized during the vesting period.
Unfortunately, there is a substantial risk of forfeiture associated with the Section 83 b election that goes above and beyond the standard forfeiture risks inherent in all restricted stock plans. He will not be able to recover the taxes he paid as a result of his election. Some plans also require the employee to pay for at least a portion of the stock at the grant date, and this amount can be reported as a capital loss under these circumstances.
The taxation of RSUs is a bit simpler than for standard restricted stock plans. Because there is no actual stock issued at grant, no Section 83 b election is permitted.
What Is Restricted Stock?
Meanwhile, the stock option has lost % of its value while the restricted stock has only lost 20% of its value. Employee Ownership Through Restricted Stock One of the advantages restricted stock has from a management perspective is that as a motivating tool it allows employees to think, and act, like owners. In and of themselves, RSUs are a good, solid equity compensation vehicle. An RSU is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. Once the units vest, the company distributes shares, or sometimes cash, equal to the their value. RSUs (or Restricted Stock Units) are shares of Common Stock subject to vesting and, often, other restrictions. In the case of Facebook RSUs, they were not actual Common shares, but a “phantom stock” that could be traded in for Common shares after the company went public or was acquired.