Restricted stock: RSUs and RSAs
Are you new to the world of equity administration and not sure how restricted stock works? Or maybe you just need a refresher before your participants start asking you for help? Either way, you're in luck, because this article covers everything you need to know about restricted stock units and awards, including how they're taxed.
Your company can compensate your participants in the form of restricted stock units (RSUs) or restricted stock awards (RSAs). These are "restricted" because certain conditions (such as length of employment or performance goals) must be met before the shares vest. Upon vesting, the ownership of the shares shifts to them, and the shares are then deposited into their account.
Ahead, we'll cover:
- How restricted stock is taxed
- How participants can sell their shares
- Cost basis and tax forms
- Common questions about restricted stock
How restricted stock is taxed
Taxes come into play twice: first, when the shares are delivered to your participants, which is typically when they vest, and then again when the shares are sold.
Note: This section refers to U.S. taxation. International tax filers may have different obligations.
RSUs
Taxes upon delivery
Participants will pay ordinary income tax on the fair market value of the stock, which is determined by your company and typically based on the market price of the stock upon delivery.
Taxes upon selling
When participants sell their shares, they will incur a capital gain or loss, depending on whether the value of the stock increased or decreased. Any gain will be subject to capital gains tax.
Shares sold within one year of receipt are subject to short-term capital gains and will be taxed at the participant's income tax rate. If a participant sells their shares more than one year after receipt, those shares are subject to long-term capital gains and will typically be taxed at a lower rate.
RSAs
The tax rules are similar for RSAs, with one potential tax benefit. RSAs let your participants take advantage of the 83(b) election, which allows them to report the stock award as ordinary income in the year it's granted rather than the year it vests. This is advantageous if they anticipate making significantly more income and falling into a higher tax bracket in the future. Note: Your participants need to make the election within 30 days of the grant.
Keep in mind that they'll need to complete the IRS 83(b) section of Form 15620 and mail it to the IRS within 30 days of your grant date. They'll also need to mail a copy of the completed form to you.
How participants can sell their shares
Prior to selling any shares, your participants will want to carefully consider the tax consequences and their personal financial situation. For advice, your participants can contact a tax advisor or a Financial Consultant through us.
Cost basis and tax forms
When your participants are filing their taxes, it's important for them to be mindful of the cost basis they report. Cost basis is the fair market value their company assigned to the shares at vesting. Using the correct cost basis ensures that they file correctly and aren't taxed more than the required amount. You can share this cost basis sheet with your participants to help them determine the cost basis on their stock plan transactions so they can file their taxes accurately.
Common questions about restricted stock
- What is a vesting schedule?
Vesting schedules are often time-based, requiring your participants to work at the company for a certain period before vesting can occur. Here's an example of how vesting might work. Let's say your participant is granted 500 RSUs. Their vesting schedule spans four years, and 25% of the grant vests each year. On the first anniversary of their grant date—and on the same date over the subsequent three years—125 shares vest.
- How does an RSU become a share?
After vesting, companies release shares of common stock to the employee. Once this happens, participants can hold or sell the shares just as they can with any other kind of stock.
- What's the difference between an RSU and an RSA?
With RSAs, your participants may have voting and dividend rights because your company sets aside actual shares upon the grant. RSUs, on the other hand, are more like a promise to pay out shares or their equivalent value in cash. No shares are set aside upon the grant, so your participants don't have the same rights to voting or dividends as with an RSA, but some do allow a dividend equivalent to be paid in cash.
- What happens to my restricted stock when I leave the company?
If your participant leaves your company, vesting may stop, and they may forfeit any unvested shares. They should review their grant agreements or consult with you regarding the terms and conditions for vested and unvested equity awards.
Want to share this information with your participants?
You can send them this version of the article above.