What Are Restricted Stocks amp Restricted Stock Units RSUs
What Are Restricted Stocks & Restricted Stock Units (RSUs) Skip to content
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access
Sam becomes vested in 1,000 shares of restricted stock on September 5th. The stock closes at $45 per share that day. He will have to report $45,000 of earned compensation for this. If he is in a graded vesting plan, then the closing share price on each vesting date is used. This income will be added to the rest of his wages on the W-2 form.
Joan learns that she will be granted 1,000 shares of restricted stock. The company stock price is $10 on the date of grant. Joan feels that the share price will appreciate substantially in the next five years, so she elects to pay tax now on the stock under Section 83(b). She is taxed on $10,000 of ordinary compensation as a result. Five years later, she becomes fully vested in the stock under a cliff vesting schedule, and the stock is worth $25 a share. Joan effectively escapes taxation on $15,000 of income under this provision. However, if the stock price was lower than $10 when she became vested, then she would have no way to recoup the taxes she paid based on the higher share price on the grant date.
What do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. ExploreManage Money
You've got it. Learn what to do with it. ExploreSave Money
You have it. Make sure you have some later too. ExploreSpend Money
You're spending it. Get the most for it. ExploreBorrow Money
You're borrowing it. Do it wisely. ExploreProtect Money
You don't want to lose it. Learn how to keep it safe. ExploreInvest Money
You're saving it. Now put it to work for your future. ExploreCategories
About us
Find us
Close menuWhat do you want to do br with money
Popular Searches
Learn more about your money
Make Money
You need it. Learn how to make it. ExploreManage Money
You've got it. Learn what to do with it. ExploreSave Money
You have it. Make sure you have some later too. ExploreSpend Money
You're spending it. Get the most for it. ExploreBorrow Money
You're borrowing it. Do it wisely. ExploreProtect Money
You don't want to lose it. Learn how to keep it safe. ExploreInvest Money
You're saving it. Now put it to work for your future. ExploreCategories
About us
Find us
Close menu Advertiser Disclosure Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all banks, credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, Chase, U.S. Bank, and Barclaycard, among others. Invest MoneyWhat Are Restricted Stocks & Restricted Stock Units (RSUs)
By Mark Cussen Date September 14, 2021FEATURED PROMOTION
Restricted stock and restricted stock units (RSUs) have become a popular choice for many firms that wish to reward employees with a share of ownership in the company without the administrative complexity of traditional stock option plans. Restricted stock plans have shown themselves to be more beneficial than their traditional counterparts in the sense that it is not possible for the stock to become worthless, as it is for options or rights. But while restricted stock and RSUs are similar in many respects, most employers tend to favor RSUs. This is because they allow companies to defer the issuance of actual shares to participants for a period of time.What Is Restricted Stock
Restricted stock is stock that, as the name implies, comes with certain restrictions on its issuance and sale by the employer. This type of stock should not be confused with the other category of restricted securities that are issued to corporate executives under SEC Rule 144, which prohibits insider trading. Restricted stock can be issued to any type of employee in a company, and its issuance and administration are not governed by Rule 144, per se. However, restricted stock is a separate entity from qualified retirement plans, such as a 401k, that fall under ERISA regulations. It does not receive tax-advantaged treatment of any kind the way qualified plans do.You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
Get Priority Access
Structure and Purpose
Restricted stock is granted to an employee on the grant date in a manner similar to that of traditional stock option plans. However, restricted stock does not have an exercise feature; the stock is usually retained by the company until its vesting schedule is complete. Restricted stock is classified as a “full-value grant,” which means that the shares carry the full value of the stock at the time it is granted. Restricted stock resembles traditional non-qualified plans in that there is a substantial risk of forfeiture to the employee. If the requirements of the vesting schedule are not met, then the employee forfeits the stock back to the employer.Vesting Schedule
Employers issue restricted stock as a means of motivating employees to accomplish certain corporate goals. There are generally three types of vesting conditions used for restricted stock: Employee Tenure. Many restricted stock plans simply require the employee to remain employed at the company for a certain period of time, such as three to five years.Employee Performance. Some vesting schedules pay out upon the accomplishment of certain company goals, such as the development of a new product or reaching a certain threshold of production.Accelerated Vesting. Accelerated vesting can be used if the company becomes insolvent or bankrupt (so that the employee might at least receive something before the stock becomes worthless) or the employee dies or becomes disabled. Some vesting schedules combine these features. For example, a firm might offer a four-year vesting schedule that will accelerate if the employee were to accomplish certain goals or tasks. The vesting schedules for restricted stock mirror those of qualified profit-sharing plans, and may be either “cliff” or “graded” at the employer’s discretion. Cliff vesting is an arrangement where the employee receives all of the shares at once after a certain period of time, such as five years. Graded vesting periodically removes the restrictions on a portion of the shares over a set period of time – for instance, 20% of the shares once per year over a five-year period from the time of grant.Taxation of Restricted Stock
As with non-qualified stock options, restricted stock is not taxed at the time of grant (or exercise, since there is no exercise feature here). The value of restricted shares becomes fully taxable when they become vested; that is, when there is no further risk of forfeiture and the employee takes constructive receipt of the shares. The amount that is taxed equals the number of shares that become vested on the vesting date multiplied by the closing price of the stock. This amount is taxed to the employee as compensation at ordinary income rates, regardless of whether the employee immediately sells the shares or holds the stock for a period of time. Payroll taxes – including state, local, Social Security, and Medicare taxes – are taken out, and the employer may choose to reduce the number of shares paid to the employee by the amount of shares necessary to cover the withholding taxes. Employees who choose to keep the shares and sell them at a later date report short- or long-term gains or losses accordingly, with the share price or prices on the date (or dates) of vesting becoming the cost basis for the sale. Example of Taxation at VestingSam becomes vested in 1,000 shares of restricted stock on September 5th. The stock closes at $45 per share that day. He will have to report $45,000 of earned compensation for this. If he is in a graded vesting plan, then the closing share price on each vesting date is used. This income will be added to the rest of his wages on the W-2 form.
Section 83 b Election
Employees who receive restricted stock must make an important choice once they enter into these plans. They have the option of paying the tax at the time of vesting, or they can pay the tax on the stock at the time of grant. Section 83(b) of the Internal Revenue Code permits this election and allows employees to pay the tax before vesting as a means of possibly paying less tax overall. Of course, whether this strategy works is completely dependent upon the performance of the stock. Example of 83(b) ElectionJoan learns that she will be granted 1,000 shares of restricted stock. The company stock price is $10 on the date of grant. Joan feels that the share price will appreciate substantially in the next five years, so she elects to pay tax now on the stock under Section 83(b). She is taxed on $10,000 of ordinary compensation as a result. Five years later, she becomes fully vested in the stock under a cliff vesting schedule, and the stock is worth $25 a share. Joan effectively escapes taxation on $15,000 of income under this provision. However, if the stock price was lower than $10 when she became vested, then she would have no way to recoup the taxes she paid based on the higher share price on the grant date.