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Tax Planning: Restricted Stock Units

By August 17, 2017No Comments


A Restricted Stock Unit (RSU) compensation scheme is designed to give employees ownership in their company and incent them to stay with the company. RSUs are typically granted at start of employment or as part of an annual performance bonus plan. In almost all cases they come with a vesting schedule, which delays the time until publicly traded shares are delivered.

Understanding taxation comes down to understanding the difference between granting units and delivering shares. A grant is simply a promise that shares of stock will be provided at some point in the future, based on the rules of the plan. While it may be beneficial to the employee, it is not income because nothing real has been provided.

When RSUs are converted into shares and delivered, normal income is generated, which requires withholding. Most employers hold back an appropriate number of shares to cover withholding, making the net delivery of shares slightly less than the grant.

Since a number of shares is delivered, rather than a dollar amount, the income earned will depend on the publically traded price of the stock on the day of the delivery. The delivery date and the value of the shares on that date becomes the basis for future disposition of shares by the employee.

For tax purposes, RSU compensation schemes are simply another form of income. The fact that the income is denominated in publically traded shares or that the exact amount is not finalized until delivery does not change a fairly straight forward transaction.

Filing taxes with granted shares does require that the correct forms be filed, using information from an associated 1099. This is a minor complication, which can be easily managed. If you are considering assistance in filing taxes, please contact us.