From Apple, Amazon, Microsoft, or Tesla to new IPO companies, grants of restricted stock or restricted stock units (RSUs) are now more common than grants of stock options at public companies. Whether you consult a financial advisor or do your own tax and financial planning, you need to understand some core issues with these grants to build wealth and prevent costly mistakes.
From my experience with the stock plan participants and financial planners who use myStockOptions.com, answering the questions in the checklist below is a good way to start making the most of restricted stock/RSU grants.
1. Do I have a grant of restricted stock or a grant of restricted stock units? What are the key differences?
2. Is formal acceptance of the grant required? What happens if I don't accept the grant before vesting?
3. What is the vesting schedule?
4. Is vesting based on duration of employment or on performance goals?
5. What would happen to the vesting of my grant if I were to leave or lose my job, die, become disabled, or retire?
6. When the shares vest, what account will they appear in?
7. Does the company offer a choice for the tax withholding, or does it hold back shares to pay the taxes?
8. With RSUs, can I defer the delivery of the shares at vesting?
9. If my company pays dividends to shareholders, will I get dividends on my restricted stock? If so, when? What if I have a grant of RSUs instead?
10. What would happen to my restricted stock in a corporate acquisition or merger?
If you don't know the answers to some of these questions, look at the stock grant agreement, the stock plan, and any employment agreement. You may want to double-check those documents in any case just to confirm the facts and detect any inconsistencies. When the answers in the documents are unclear or raise new questions, ask your company’s stock plan administrator or the appropriate contact in the HR department.
Tax Treatment In A Public Company
In addition, you should understand the key aspects of the standard tax treatment:
- Your taxable income is the market value of the stock when the restrictions lapse (or at grant with an 83(b) election for restricted stock), minus any amount paid for the shares.
- You have compensation income that is subject to ordinary income tax, Social Security, Medicare, and any state and local tax.
- The income is subject to mandatory supplemental wage withholding, which for US income taxes is a flat rate.
- The amounts of taxable income and the taxes withheld are included in the corresponding boxes of the your Form W-2.
- The capital gains holding period starts the day after vesting/share delivery (or at grant with an 83(b) election for restricted stock). You have tax return reporting on Form 8949 and Schedule D for the stock sale even if you flip the shares immediately at vesting.
Private And Pre-IPO Companies
With early-exercise stock options in a private company, you receive restricted stock at exercise (not RSUs) that follows the same vesting as the original stock option grant. These same rules above apply. However, the Section 83(b) election needs to be within 30 days of exercise, with the taxable income being the spread at exercise.
Some larger pre-IPO companies also grant RSUs that have double-trigger vesting. The first vesting condition is met when you work at the company for the required period. The second condition, which then vests the shares, is when a liquidity event occurs for your company, such as an IPO or acquisition.
You want to carefully check your stock plan documents to see how soon after the liquidity event the second vesting trigger occurs, as this is when you’ll have a big income hit, and whether the company has the flexibility to change it (e.g. from the end of the lockup to the IPO date). You want to add this to your RSU question list when you work at a private company. Also ask whether the company’s RSU grant qualifies for the five-year tax deferral election in the new tax code Section 83(i).
Quizzes To Test Your Knowledge Of These Stock Grants
You can your knowledge of restricted stock units and restricted stock with two fun, free interactive quizzes on myStockOptions.com:
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