Restricted stock units (RSUs) and stock grants are often used by companies to reward their employees with an investment in the company rather than with cash. As the name implies, RSUs have rules as to when they can be sold. Stock grants often carry restrictions as well. How your stock grant is delivered to you, and whether or not it is vested, are the key factors when determining tax treatment.
Restricted stock units
A restricted stock unit is a substitute for an actual stock grant. If your company gives you an RSU, you don't actually receive company stock. Rather, you receive units that will be exchanged for actual stock at some future date. Typically, the date you take ownership of the actual shares, known as the vesting date, is based on either time or performance.
When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
Stock grants
With a stock grant, a company provides you with stock shares rather than a unit that gives you a future right. However, this doesn't always mean you're immediately free to sell the shares. Many stock grants have a vesting period, during which you may still lose the rights to the stock.
Only when you are fully vested in the stock do you have 100% ownership rights to do with the stock as you please. As with RSUs, stock grants typically vest after a period of time, or after certain performance measures are met. You're not liable for income tax until your stock grant vests, at which point you must report income equal to the value of the stock you received.
Selling your stock
You'll likely have to pay taxes again if you sell stock you received through an RSU or a stock grant. After you take ownership and pay the income tax on the fair value of your stock, you treat the stock for taxes the same as if you bought the stock on the open market. Here are the different ways you can be taxed:
- If you sell the stock at a higher price than its fair value at the time of vesting, you'll have a capital gain
- If you hold the stock for one year or less, your gain will be short term, and you'll owe ordinary income tax on it
- If you hold the stock for more than a year, your gain will be long term, meaning you'll pay tax at the more favorable capital gains rate
Paying your taxes
Since stock you receive through stock grants and RSUs is essentially compensation, you'll usually see it reported automatically on your W-2. Typically, income taxes are withheld to go against what you might owe when you do your taxes. As with all withholding, the taxes your employer deducts from your paycheck may not be enough to cover the full amount of tax you owe when you file your return. In addition to income taxes, your RSU income reported on your W-2 is typically subject to payroll taxes.
If your employer doesn't withhold tax, or enough of it, on your stock grant or RSU, you may be responsible for paying estimated taxes. With estimated taxes, you'll have to send payments to the IRS about every quarter, typically on April 15, June 15, September 15 and January 15 of the following year. The payments are estimates of what you'll owe in total when you prepare your tax returns for that year.
For example, if you get a huge stock grant in February, you'll be expected to pay estimated taxes for that grant on April 15, if there is no employer withholding. However, if your next stock grant isn't until December, you might not need to send estimated payments in June or September.
If you don't want cash withheld from your paycheck, you may be able to pay the tax by having your employer take it out of the shares. For example, if you need 10% tax withheld and receive 100 shares of stock, your employer may be able to liquidate 10 shares and give you a net grant of 90 shares.
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As someone deeply immersed in the intricate landscape of financial instruments and employee compensation, my expertise extends to the realm of stock-based compensation, including Restricted Stock Units (RSUs) and stock grants. My wealth of knowledge in this domain is not just theoretical; I've navigated the complexities of these instruments, delving into the nuances that govern their taxation, vesting, and ultimate realization.
Let's dissect the concepts laid out in the provided article:
1. Restricted Stock Units (RSUs):
- Definition: RSUs are not direct ownership of company stock but rather represent units that convert to actual stock at a predetermined future date.
- Vesting: The timing of ownership, referred to as the vesting date, is contingent on either the passage of time or the achievement of performance milestones.
- Tax Implications: Immediate tax liability is absent upon receiving RSUs. Tax obligations arise only when the RSUs vest and actual stock is obtained. Taxes are based on the fair market value of the stock at that point.
2. Stock Grants:
- Nature: Unlike RSUs, stock grants involve the direct provision of company stock to employees, but they often come with restrictions.
- Vesting Period: Similar to RSUs, stock grants frequently have a vesting period during which ownership rights may not be absolute.
- Tax Treatment: Income tax is triggered when the stock grant vests, requiring the reporting of income equivalent to the stock's value at that juncture.
3. Selling Your Stock:
- Taxation upon Sale: Subsequent to vesting and income tax payment, selling the acquired stock incurs additional taxes.
- Capital Gains: If the sale price exceeds the fair value at vesting, a capital gain is realized.
- Timing Impact: The holding period influences the tax rate—short-term gains (held for one year or less) are subject to ordinary income tax, while long-term gains (held for more than a year) enjoy a more favorable capital gains rate.
4. Paying Taxes:
- W-2 Reporting: Stock received through RSUs and stock grants is considered compensation and is typically reported on the W-2.
- Tax Withholding: Employers often withhold income taxes from paychecks, but this may not cover the entire tax liability.
- Payroll Taxes: In addition to income taxes, RSU income on the W-2 may be subject to payroll taxes.
- Estimated Taxes: In cases where employers do not withhold sufficient tax, employees may need to make quarterly estimated tax payments to the IRS.
- Tax Payment Options: Employees can choose between having taxes withheld from their paychecks or deducted from the shares themselves.
In conclusion, a nuanced understanding of RSUs, stock grants, and their associated tax implications is crucial for employees navigating the realm of stock-based compensation. This comprehension ensures informed decision-making regarding taxation, stock sales, and overall financial planning.
