Stock Options vs. RSU
If you make a Section 83 b election described below , your dividends may be reported on a DIV, or, if you are not an employee of the company, your dividends may be reported on a MISC. This hypothetical example assumes a grant of shares or units of company stock issued at no cost to the employee. Please keep in mind that these examples are hypothetical and for illustrative purposes only.
Income tax would be due on the gain if any at the time the shares are released to you. Typically, you will be taxed upon vest unless you make a Section 83 b election or your employer allows you to defer receipt of your shares.
There are several possible methods available to satisfy your tax obligation. You should check your plan documents to determine which tax payment method s are available to you. Types of payments include:. Your employer keeps a portion of the shares to pay taxes. The remaining shares if any are deposited to your account. Shares sufficient to cover the taxes are sold and the remaining shares if any are deposited to your account.
To select your desired tax payment method, log on to etrade. From the Stock Plan Overview page, click on Account. Customer Service is available Monday to Friday, 24 hours a day, online at etrade. From outside the US or Canada, go to etrade. One of our dedicated professionals will be happy to assist you. Understanding restricted and performance stock. How do restricted stock and performance stock work? Know the types of restricted and performance stock. US tax considerations. Taxes at vest The value of your shares when they vest, less the amount you paid for the shares, is treated as ordinary income.
Taxes at sale When you sell your shares, any capital gains or losses will be realized. Acceleration Section 83 b election : In some cases, it is possible to move up the first tax trigger from the vest date to the grant date by filing a Section 83 b election with the Internal Revenue Service IRS.
This must be done within 30 days of the grant. Please keep in mind that paying taxes at grant can be risky, therefore, you should consult with your tax advisor, as there are no allowances for refund or tax loss if your shares fail to vest. You should check with your company to see if it allows this type of election. Even if a deferral election is made, applicable taxes will typically be due at vest. However, income taxes can usually be deferred until the shares are released to you. You should check with your company to see if it allows this type of election and consult with your tax advisor.
Section 83 i election: In some cases, it is possible to defer the first tax trigger from the vest date to a later date by filing a Section 83 i election with the Internal Revenue Service IRS. This must be done within 30 days of the vest date. If the election is made, ordinary income is determined on the original vest date, but the income inclusion can be deferred to the earlier of: 1 the first date the underlying stock becomes transferrable, 2 the first date that the employee becomes excluded, 3 the first date that the underlying stock becomes tradable on a stock exchange; 4 five years after the original vest date, or 5 the date that the employee revokes the election.
Again, you should check with your company to see if it allows this type of election and consult with your tax advisor. Taxes at dividends Any dividends received on your shares are typically considered income and are treated as such in the year they are received. Examples with 83 b election. Possible US tax payment methods. Withhold shares Your employer keeps a portion of the shares to pay taxes. Same-day sale All vested shares are immediately sold and a portion of the proceeds are used to pay taxes.
Sell-to-cover Shares sufficient to cover the taxes are sold and the remaining shares if any are deposited to your account. With restricted stock, you own the shares from the day they are issued. The most common restrictions are time-based and involve a vesting schedule , which means you earn them over time. This incentivizes employees to stay with the company. If the employee leaves, the company can repurchase the stock.
What is the difference between RSU and PSU? | AnswersDrive
Sean is one of the first five employees at a startup. RSA shares are given to employees on the day they are granted. RSAs are typically issued to early employees before the first round of equity financing, when the FMV of common stock is very low. RSAs provide the individual the right to purchase shares at FMV, at a discount, or at no cost on the grant date. Gus is our second example employee, and he joins the same company seven years later.
The company is now successful and the share price has increased dramatically.
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An RSU is common stock that will be delivered at a future date, contingent on vesting and performance conditions. RSU shares are not received until the restrictions lapse. The date you actually receive your RSU shares can be a vesting date, a liquidation event, a specified date in the future, or some combination of these. This future date is established when the RSU is granted. Another key difference from an RSA is that the RSU holder does not pay anything to own the shares outside of applicable taxes. Vesting means you have to earn your shares over time.
Because you legally own RSA shares when they are granted to you, vesting only impacts whether the company can repurchase your shares if you leave or are terminated. Most companies have vesting schedules in place to prevent individuals from joining a company, receiving their RSA award, and leaving immediately. RSU shares are not issued to the recipient until they vest. When a company grants RSUs, they are promising to issue those shares at a later date based on the vesting schedule. RSUs can have multiple vesting conditions. Sean keeps all of his vested shares.
His unvested shares, however, are subject to a company repurchase. That means the company can buy the shares back from Sean. Companies will usually repurchase shares at the same price Sean paid for them.
It is important to note that the company has the right, but not the obligation, to repurchase the shares from the employee. Regardless of liquidation conditions, any shares that are not time-vested are forfeited at termination.
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Some companies will allow ex-employees to keep RSUs which have met the time-based vesting requirement but not the event-based vesting requirement. It is important to read the grant agreement to understand what will happen to your RSUs in the event you leave the company. There are two types of tax to consider with equity compensation: ordinary income tax and capital gains tax. The main thing to remember is that the capital gains tax rate is generally lower than the ordinary income tax rate.
The tax treatment of RSAs and RSUs is complicated and confusing — knowing how taxation works with these forms of equity compensation can potentially help startup employees save thousands of dollars. Remember, any time your company pays you — whether in salary, benefits, or equity — you owe taxes on that income. Because Sean paid for them on the vest date, his company is not giving him any additional value. Eventually those shares may increase in value. If they do, Sean will have to pay taxes on the gain. Any taxable gain between the grant date and vesting is subject to ordinary income tax.
Once the shares vest, Sean owns them. At this point, any subsequent gain between vesting and sale is subject to capital gains tax.
How Performance Shares Differ From Restricted Stock
The yellow line in the graph could just as well plummet after vesting, and the shares would be worthless. The 83 b election means that you can choose to pay all of your ordinary income tax up front.
After this window passes Sean will not be able to file the election. By filing an 83 b election, Sean is choosing to recognize ordinary income tax up front. Even when the RSA shares vest, Sean pays no tax. This is favorable for two reasons:. The main thing to know about RSUs and taxes is that you pay ordinary income tax when your shares vest.
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Gus decides to sell his RSU at the same time it vests. He will be taxed when the time-based vesting AND liquidation requirements are satisfied. To recap:.