Restricted stock constitutes a form of employee bonus. Restricted stock grants occur when employers give stock to employees. Employees can only access these shares upon vesting. Vesting occurs on a set future date when an employee may access restricted shares. The tax consequences of a company voting to provide restricted stock fall on the shoulders of the employees receiving this stock. Technically speaking, the action of voting for restricted stock carries no tax consequences.
Restricted Stock Tax
Employees receiving restricted stock must pay taxes on the stock as a form of income and on any capital gains earned on restricted stock. For instance, assume your employer grants you 1,000 shares of restricted stock valued at $30 per share upon vesting. You pay taxes on the $30,000 value of these shares as a form of income. If you sell your stocks a year from vesting at $35 per share, you pay capital gains tax on the $5 surplus earned on each share. You pay taxes at state and federal levels on restricted stocks.
Section 83(b) constitutes an item of federal tax law. You can pay taxes on restricted stocks upon granting, rather than upon vesting, as per this item. Employer stipulations and your restricted stock agreement determine whether you can file upon granting through section 83(b). If restricted stocks rise in value between granting and vesting you save money by paying taxes upon granting. However, if shares lose value, or if you forfeit your restricted shares, you lose money by paying taxes upon vesting.
Restricted stocks may pay dividends upon granting, whether you pay taxes at this point or upon vesting. If you pay taxes upon granting through section 83(b) you pay taxes on dividends as dividend income, rather than as compensation. If you pay taxes upon vesting, all dividends earned between granting and vesting qualify as ordinary income, not dividends, for tax purposes. All dividends earned after vesting qualify as dividend income for tax purposes, regardless of section 83(b) status.
Restricted Stock Units
Restricted stock units (RSU) differ from restricted stocks in key ways that affect taxation. When a company grants an RSU, it promises to deliver shares at a future date. When an RSU vests, employees receive shares. Employees can only pay taxes on RSU shares upon vesting because they do not own these shares at any point previous to vesting. Upon vesting, standard tax rates apply to RSU shares as income and any capital gains earned from selling shares.
Some tax action taken by employers in the case of restricted stock depends upon action taken by the employee receiving these shares. For instance, employers can deduct the value of restricted shares from taxable income in the year in which the employee pays taxes on those shares. Employers must report the value of restricted stock as income paid either upon granting or vesting, depending upon when the employee elects to pay taxes.
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