Equity Compensation Part 4 ‐ Restricted Stock Units

 In Tax News

What They Are

Restricted Stock Units (“RSU”s) are considered a hybrid of stock options and restricted stocks. RSUs are generally granted by an employer either at a specified point in the future, after a specified amount of time, or after required performance milestones are achieved. If the employee does not satisfy the vesting requirements, then the shares are typically forfeited. Upon vesting, the employee’s rights become non-forfeitable and actual payment occurs under a distribution schedule. If the plan allows, employees may also delay their right to receive actual stock to a later date. The employee generally will not have dividend and voting rights until the actual shares are issued.

What to Know

An employee with RSUs will not be taxed on those units at the time of the grant. The employee will be taxed at vesting. Upon vesting, the shares are considered income, and a portion of the shares are withheld to pay income taxes. The amount of income subject to tax will be the fair market value of the grant at the time of vesting. The amount included in the employee’s income will be subject to ordinary federal income tax withholding and FICA/Medicare tax withholding at payment. This income will be reported on Form W-2 for employees and Form 1099-MISC for non-employee recipients. The employer will receive a tax deduction equal to the employee’s income recognition offset by FICA/Medicare liability. The employee receives the remaining shares and can sell them at any time. The IRC 83(b) election is not available for RSUs.

Contact Hone Maxwell LLP today with questions about Restricted Stock Units and related tax planning.

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