Finding innovative ways to attract and retain qualified employees can be a challenge for some companies. Restricted stock awards and stock options are two perks that might make a hiring package more attractive. Both types of stock grants require a vesting, or holding, period before you can realize any cash from them. Because vested stocks are yours to keep, they do not expire; however, you can forfeit unvested stocks if you no longer qualify for the award at the time they are due to become vested.
Stock options and restricted stock awards are a type of pay-for-play compensation. The company wants you to earn the right to purchase stock or sell your restricted stock. You typically earn this right by remaining employed by the company or by helping the company reach certain performance goals. The time between receiving the options or awards is the "vesting" period. For example, a company might offer you 10,000 shares of restricted stock that vests annually in equal installments beginning on your first anniversary and continuing for five years. This means that one year from the date you were hired, 2,000 shares of stock are yours to sell, trade or retain. Each year thereafter, another 2,000 shares belong to you until you receive all 10,000 shares or the offer is no longer valid.
Unlike stock options, vested stocks do not expire. Once vested, the stocks are yours to do with as you see fit. Unvested stocks, however, may be lost if you leave the company before the time is up or the goals outlined in the agreement are not met. The exact conditions depend on the terms stipulated in the contract between you and your employer.
Vested stocks should not be confused with vested stock options. Restricted stock awards provide you with shares once you have satisfied the vesting period, but stock options only give you the right to purchase shares at some future date for a price specified in the offer. Stock options typically not only have conditions you must meet, such as being an employee of the company at the time you exercise your options, but a date by which you must purchase the stock. Unexercised options expire on the date stated in the option offer made by your company.
The effect on your federal income tax depends on whether you choose to elect an 83(b) treatment option. This election means that you include as income the fair market value of all shares covered by the restricted stock award at the time of the award even if they are not vested. No additional federal taxes are due until you sell the stock. At that point, you might be able to claim the income from the sale as a capital gain rather than ordinary income. You must file an 83(b) form within 30 days of the award date and include a copy of the form when you file your annual return. If you do not make an 83(b) election, you pay income tax on the shares as they vest.
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