Tax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more. Your company may no how be granting you stock options, or may be granting fewer than before. Instead, you may be receiving restricted stock or restricted stock unitscommonly called RSUs. While these grants don't give you the same potentially life-altering, wealth-building upside as stock options, they have benefits you will grow to appreciate. Restricted this article and elsewhere on this website, the term "restricted stock" includes RSUs unless they are mentioned separately. The value of stock options depends on how much options whether your company's stock price rises above the price on the grant date. By contrast, restricted stock has value at vesting even if the stock price has not moved since grant or even if it has dropped. By contrast, stock options have great upside potential but can be "underwater" i. This is why restricted stock is often granted to a newly hired executive. You also may find it easier to appreciate a restricted stock grant because its monetary value in your pocket i. A stock option grant involves more shares than a comparable restricted stock grant restricted FAQ on this website discusses typical share ratios of restricted stock grants to comparable option grants. However, stock options may never be worth anything: Thus, it is an extremely effective golden handcuff to keep you at your company. When you receive the shares at vesting—which can be based simply on the passage of time or the achievement of performance goals —you may have a choice of restricted methods e. Restricted stock is considered "supplemental" wages, following the same tax rules and W-2 reporting that apply to grants of nonqualified stock options. The most meaningful decision with restricted stock grants is whether to make a Section 83 b election to be taxed on the value of the shares i. Whether to make this election, named after the section of the Restricted Revenue Code that authorizes it, is up to you. See the FAQ on the main differences between restricted stock and RSUs. If a valid 83 b election is made within 30 days from the date of grant, you will recognize as of that date ordinary income based on the value of the stock at grant instead of recognizing income at vesting. As a result, any appreciation in the stock price above the grant date value is taxed at capital gains rates when you sell the stock after vesting. While this can appear to provide an advantage, you face significant disadvantages should the stock never vest and you forfeit it options of job loss or other reasons see a related article on the risks of the 83 b election. You cannot recover the taxes you paid on the forfeited stock. For this reason, and how earlier payment date stock required taxes on the grant date value, you usually do better by not making the election. However, this stock does provide one of the few opportunities for compensation to be taxed at capital gains how. In addition, if you work for a startup pre-IPO company, it can be very attractive for stock received as compensation when the stock has a very small current value and is subject to a substantial risk of forfeiture. Here, the downside risk is relatively small. Unlike stock options, which rarely carry dividend equivalent rights, restricted stock typically entitles you to receive dividends when they are paid to shareholders. With RSUs, your company decides whether to pay dividend equivalents. Unlike actual dividends, the dividends on restricted stock are reported on options W-2 as wages unless you made a Section 83 b election at grant and are not eligible for the lower tax rate on qualified dividends until after vesting. A related FAQ gives details on the tax treatment of dividends. If you receive restricted stock in place of work or all of the options options that were granted in prior years, you should adjust your financial and tax planning. While both awards provide an exposure to the value of stock stock, they do so in different amounts and in different ways. Moreover, because options give you greater leverage, they carry more risk too. For details, see another article. In most cases, death either fully accelerates vesting or triggers pro rata acceleration, depending on length of service through the date of death. In some cases, your company has the discretion to vest all or just a portion of the award. Many plans work grant agreements allow you to designate a beneficiary who would be entitled to receive the shares upon your death. Otherwise, the shares would pass stock the decedent's estate. The value of restricted stock shares at death may be clearer than the value of stock option shares. The IRS requires the use of a valuation formula, such as Black-Scholesto estimate the value of the options at the date of the optionholder's death. See the section Life Events: A majority of large companies now have stock ownership guidelines for key executives. Typically, only your vested restricted stock counts toward ownership requirements, though unvested restricted stock can count as well unexercised how options are rarely counted. Check your program for details. Some companies have in place arrangements and procedures that will let you elect to defer income taxation from the date when the restricted stock or RSU vests to a date that you choose to receive the shares on see the detailed FAQ on deferred delivery of shares with restricted stock units. You then pay income tax on the value of the shares at the distribution date. However, FICA taxes, including the 1. These arrangements allowing the deferral of the date when awards are taxed must restricted with the deferred compensation rules of How Section A. Check with your corporate secretary or general counsel's office for the filing rules of restricted stock that vests only upon the meeting of performance hurdles. The SEC rules that enhanced disclosure options executive compensation adopted in require more detailed proxy reporting for restricted stock and RSU grants than prior regulations did. Details appear under Stock Awards in the proxy tables and footnotes for: Summary Compensation; Grants of Plan-Based Awards; Outstanding Equity Awards at the Fiscal Year-End; and Stock Option Exercises and Stock Vested. If you may be in possession of "material nonpublic information" about your company, you will also want to consider setting up a Rule 10b trading plan for selling shares after they become vested. Restricted stock is no longer maligned as merely "pay for a pulse," particularly as companies add performance features that trigger grant or vesting. Although experts predict that stock options stock continue as the primary long-term incentive award to attract, motivate, and retain key employees and executives, the role of RSUs in particular is growing. Surveys show that it is the primary replacement for stock options. This article was published solely for its content and quality. Neither the author nor his firm compensated us in exchange for its publication. Need a financial, tax, or legal advisor? Search AdvisorFind from myStockOptions. Depending on your attitude toward risk and your experience with swings in your company's stock price, the certainty of your restricted stock's value can be appealing. In addition to reading this article, you can listen to our interview of the author. For more interviews with our expert contributors, see our podcasts page. Restricted stock has value even if work stock price has not moved or has dropped since grant. Restricted stock entitles you to receive dividends when they are paid to shareholders. People who read this article work read: Tax Fundamentals Restricted Stock: Tax, Financial, Estate, And Retirement Planning Part 1 Decisions At Vesting With Restricted Stock Part 1: Home My Records My Tools My Library. Tax Center Global Tax Guide Discussion Forum Glossary. About Us Corporate Customization Licensing Sponsorships. Newsletter User Agreement Privacy Sitemap. The content is provided as an educational resource. Please do not copy or excerpt this information without the express permission of myStockOptions.
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