What It Is
“Restricted stock” refers to shares of stock granted to an employee at a reduced or no cost, sometimes linked with a cash bonus to offset tax liability. Restricted stock constitutes actual ownership but is subject to restrictions on transferability and substantial risk of forfeiture. The recipient’s rights in the shares are restricted until the shares vest, which generally occurs if the employee works for the issuing company for a specified period of time. Other vesting restrictions may be based on performance‐related measures. Once the vesting requirements are met, the recipient owns the shares outright and may treat them as they would any other stock.
What To Know
In general, the recipient is not taxed at the time of the grant and is taxed upon vesting, when the restrictions expire. The amount of taxable income upon vesting is the difference between the fair market value of the grant on the vesting date and the amount paid for the grant. This income is reported on the recipient’s Form W-2 (or 1099-MISC) and is subject to FICA/ Medicare withholding. Any dividends paid prior to vesting will be considered compensation and treated accordingly.
A recipient may elect to be taxed at the time of grant by making an affirmative election under Section 83(b) of the Internal Revenue Code to include the fair market value of the stock at the time of the grant (less the amount paid for the shares) in taxable income for the grant year. This amount will be reported as income on the recipient’s W-2 (or non-employee compensation on Form 1099-MISC) and the recipient will be subject to required FICA/ Medicare withholding at the time the shares are received. In addition to the immediate inclusion in income, an 83(b) election will cause the stock’s holding period to begin when the shares are granted instead of when the grant is exercised.
Contact Hone Maxwell LLP today with questions about restricted stock and related tax planning.