Awards of business shares, such as restricted stock and RSUs, are subject to a vesting schedule that may depend on the number of years that have passed since the grant date or on the achievement of predetermined performance targets. You fully own the shares once the grant vests, at least in the case of a public business. The shares are yours to keep, sell, give away, or gift as you like (though you always need to avoid insider trading by not selling when you know important nonpublic information about the company).

When an employer grants restricted stock to an employee, the employee’s access to the shares is restricted until the shares vest and the restrictions are lifted. Stock that is restricted typically has a high risk of forfeiture. When the restricted stock is granted, there is no tax consequence; but, when the stock vests and/or the restrictions end, the taxpayer normally recognizes ordinary compensation income equal to the difference between the FMV and any possible stock purchase price. The stock’s holding period therefore starts on the day of vesting or the expiry of restrictions, and any future gain will be considered long-term capital gain if the shares is kept for more than a year after that date.

Restricted shares and RSUs, on the other hand, might deceivingly complicate financial planning for an equity award that is meant to be infallible. You also need to comprehend taxes.

Restricted Stock Units (RSUs)

Companies frequently use restricted stock units (RSUs) and stock grants to give employees a stake in the business rather than monetary compensation. RSUs have restrictions on when they can be sold, as the name suggests. Additionally, stock grants frequently have limitations. The two main elements that affect how your stock grant is taxed are how it is given to you and whether it has vested.

RSUs are essentially similar to restricted stock, with the exception that the employee receives a commitment from the employer to transfer stock or its equivalent after vesting requirements are satisfied rather than actual shares of stock at the award date. The employee is still considered to have earned ordinary compensation income upon vesting or lapse, calculated either using the FMV of the shares acquired or the amount of cash received. If stock is received, the holding period starts on the date of vesting or lapse, and any subsequent gain is considered long-term capital gain if held for a period of time greater than a year. However, with respect to RSUs, the employee is not permitted to exercise an 83(b) election, unlike with respect to restricted stock.

Stock Grants

Instead of giving you a unit that offers you a future right, a firm gives you stock shares when you receive a stock grant. However, this does not always imply that you can sell the shares right away. There is sometimes a vesting period attached to stock grants, during which you could still lose ownership of the stock.

You don’t have complete ownership rights to the stock until you are fully vested in it, at which point you can do whatever you want with it. Similar to RSUs, stock grants often vest after a particular amount of time or following the achievement of specific performance goals. Before your stock grant vests, when you must declare income equivalent to the stock’s value, you are not subject to income tax.

Selling Your Stock

If you sell shares that you acquired through an RSU or a stock grant, you’ll probably have to pay taxes again. The IRS taxes you in the same way as if you had purchased the stock on the open market after you have paid the income tax on its fair market value. Here are the many taxation methods:

  • You will experience a capital gain if you sell the stock for more than its fair market value at the time of vesting.
  • Your gain will be short-term if you own the stock for less than a year, and you’ll have to pay regular income tax on it.
  • Your gain will be long-term if you own the stock for a year or longer, in which case you’ll pay tax at the more benevolent capital gains rate.


Paying Your Taxes

Because the stock you receive as a result of stock grants and RSUs is effectively remuneration, it will typically be immediately reported on your W-2. Taxes are typically withheld to offset any potential debt you may have while filing your taxes. The taxes your employer withholds from your salary, like all withholdings, might not be sufficient to pay the full amount of tax you owe when you file your return.

You may have to pay estimated taxes if your employer doesn’t deduct taxes from your stock grant or RSU. You’ll need to transmit payments to the IRS roughly every three months with estimated taxes, usually on April 15, June 15, September 15, and January 15 of the following year. When you prepare your tax returns for that year, the payments represent an estimate of your overall debt.

For instance, if there is no employer withholding, you will be required to pay estimated taxes for a sizable stock award on April 15th. You might not be required to transmit projected payments in June or September, though, if your subsequent stock grant isn’t until December.

You might be able to pay the tax by having your company deduct it from the shares if you don’t want money taken out of your salary. Your company might be able to liquidate 10 shares and issue you a net grant of 90 shares if, for instance, you need 10% of your income tax withheld and obtain 100 shares of stock.

Tax Planning Strategies for Restricted Stock

Restricted shares and RSUs might deceivingly complicate financial planning for an equity award that is meant to be infallible. You also need to comprehend taxes. Important inquiries to put on your preparation checklist are:

  • What records include the crucial grant information?
  • When vesting, how will withholding be handled?
  • Should you keep the shares or sell them?
  • How many shares should you sell if you decide to sell, and what should you do with the money you receive?

Here are the key planning techniques recommended by our team at Credo.

Recognize Your Grant And The Documents Therein

You’d be shocked at how obvious this point appears to be. I hear from financial advisors whose clients tell them they have “stock options” but upon inspection of the plan documents it turns out they have another type of equity comp. Confirm first whether you have restricted stock or RSUs, independent from any stock options or an employee stock purchase plan, as your equity grant type.

Despite being conceptually related and close siblings, restricted stock and RSUs have significant variances that may affect your financial planning (see an FAQ on the website myStockOptions.com that outlines the differences).

Review the actual grant agreement, the award itself, the communications materials your company produced, and any third-party websites where you can examine your grant and some of the specifics (e.g. website of broker or transfer agent). From this examination, you should be aware of two key details concerning your grant:

  • Vesting schedule: When and how many shares vest?
  • What options exist for tax withholding?
  • There are a lot of other things you might need to consider:
    • How much will each vested sum be worth (pre-and after-tax)?
    • What are the characteristics of RSU grants given by private firms?
    • Is there a second trigger involving a liquidity event like an IPO or is working for the company for a pre-determined period of time after the grant enough for the shares to vest?

Consider the Tax Effect

Watch out for taxes, emphasize all of the financial planners. With restricted stock and RSUs, taxes can be difficult than anticipated.

Election for Restricted Stock Under Section 83(b)

Usually, taxes are due at the moment of vesting. With restricted stock, you can, however, choose to be taxed on the value of the shares at grant rather than at vesting by making a Section 83(b) option within 30 days of the grant date. For RSUs, this option is not available.

This decision to pay taxes on the lower value at grant can be a smart move if you’re convinced that the stock price will increase significantly between grant and vesting. It also jumpstarts your capital gains holding period. Determining whether that is a wise wager is difficult and dangerous.

Issues with Tax Withholding

The issue of inadequate tax withholding follows. Your employer is required to withhold tax at a flat rate of 22 percent in accordance with IRS regulations for supplemental pay income, such as income from the vesting of restricted shares or RSUs. (For income levels above $1 million throughout the calendar year, the rate increases to 37 percent.)

The tricky part comes afterwards. Your income tax rate is probably higher than the amount withheld from your grant as a result of the vesting of your shares, which will cause an increase in your income. Most people with just-vested restricted stock or RSUs need to pay extra taxes to make up the shortfall, whether via quarterly estimated tax payments or their tax return for the year. Therefore, you must determine how many shares you must sell in order to pay the taxes, unless you have extra cash on hand.

Prepare a forecasted tax return in advance to understand how vesting RSUs will affect your tax return. To lower the jump in your taxable income, think about strategies to postpone other income and/or enhance deductions. Boost your 401(k) contributions, take part in a nonqualified deferred compensation plan, give more to charity, or increase your salary withholding separately, among other options.

Plan Your Strategy for the Shares After Vesting

  • Set aside money each month for savings, as well as cash bonuses and welcome bonuses.
  • After the anniversary, keep 25% of the shares that vested (about 30 percent of the portfolio and a smaller percentage as the portfolio grew).
  • Reserves were set aside to cover the tax payment (each year’s tax liability was estimated with the help of a CPA).
  • Shares that are still outstanding should be sold when they become vested, with the proceeds going toward college loans, savings targets, and eventually a diversified taxable account.

This is only one strategy that can be used when shares vest. Everybody has a unique set of circumstances. Consulting a financial planner is a smart idea if you want to find solutions that work for you.


Tax Planning for RSUs

RSU tax planning is simpler than stock option tax planning. When shares are delivered under RSUs, often at vesting, you must pay income taxes.

Share Withholding: In the year that the shares are transferred to you, the value of the stock at vesting will be shown on your W-2. The corporate plan you use might deduct taxes (federal, state, local, Social Security up to the yearly maximum, and Medicare). Some plans, at least for U.S. employees, allow you to “surrender” an equivalent value of shares in order to pay the withholding taxes. Because you use company shares rather than cash to satisfy your tax responsibilities, share surrender not only allows you to avoid paying taxes in cash but also helps you diversify your stock portfolio.

Warning: You should account for this variation in the amount of taxes you will ultimately owe when preparing your taxes. You might need to set aside the additional taxes to pay when you submit your yearly return or make an anticipated tax payment for the quarter in which vesting happened.

RSU Taxation for Non-U.S. Employees: Outside of the United States, the taxation of restricted stock units occurs at a similar time. Capital gains tax is imposed on the eventual sale of the shares, while income and social taxes are calculated based on the value of the shares at the time of delivery (not grant). The Global Tax Guide, which describes the specific tax treatment in numerous nations throughout the world, is available in the Schwab Equity Awards Center.

Taxes If You Move to Another Location: If you are a U.S. employee and intend to relocate to or from a state that levies no income taxes, research the tax regulations of each state. Even if you don’t dwell in the state when the award is taxed, many states tax RSUs if you work or reside there for a portion of the vesting term. If you relocate, request that the payroll division of your business switch tax withholding from one state to another.

If you switch between countries during the vesting term, the tax apportionment will be comparable. You might be required to pay your former home country tax at the time of share distribution following vesting in proportion to the amount of time throughout the vesting period that you spent working there.

Wash Sale Rules: The wash sale rules in the U.S. tax code prevent you from deducting a tax loss associated with the sale of stock if you buy essentially identical stock within a period starting 30 days before or ending 30 days after the sale. Ask a tax expert whether the grant or the vesting is regarded a “purchase” that may defer recognition of the loss and carry it forward to the shares issued at vesting if you intend to sell other business stock at a loss.

Financial Planning Considerations

The vesting date, when you take the income hit, is a crucial date to take into account while budgeting for RSUs.

What Leads to Vesting: Time-based RSUs vest only as time goes by. You get the stock if you’re still working on the vesting date. Some performance objectives, such as hitting a target stock price or total shareholder return on earnings-per-share targets, could make vesting dependent upon them or expedite it. Make sure you are aware of the vesting triggers.

Depending on the pre-IPO company, vesting may be influenced by both the duration of employment and a liquidity event (i.e., the initial public offering).

Warning: Be prepared if your employment stops for any reason by being aware of your options (voluntary or involuntary). Know what will transpire in the event that your company is acquired, including whether the award will be canceled, whether it will continue to vest and convert to the buyer’s shares, or whether only a portion of it will.

Sell Choices: Deciding what to do with the stock once it vests involves making both an investment and a tax choice.

You must choose whether to keep or sell RSUs once they have vested. The shares can be a great source of money whether you need money for personal necessities or large purchases (like a home or college tuition). Selling the shares will almost certainly assist you in diversifying your holdings because it is common for employee portfolios to be overweight in company stock, which is typically the riskiest asset. If you frequently have access to sensitive information about your company, you might want to think about establishing a Rule 10b5-1 trading plan to make a planned stock sell easier.

Retirement Preparation

Consult the plan’s or the grant agreement’s conditions if you intend to retire before vesting. All or a portion of the award may vest upon “qualified” retirement (as that term is defined in the stock plan), taking into account your service up until the retirement date. The answer to this query will impact your retirement cash flow and any income-shifting plans. It could be possible for you to pick a retirement date that will optimize your eligibility for these benefits.

Estate Planning

Like any other asset you hold, RSUs that vest upon your death are included in your estate when you pass away. Even to family members, trusts for the benefit of family members, or family limited partnerships, RSUs often cannot be transferred for estate planning before they vest, however customs are subject to change. Find out if you can name a beneficiary to receive your RSUs if you pass away before they vest.