RSU and RSU Taxation: Learn How It Works

by Agro Accounting CPA Accounting for Artists, Freelancers & Creative Com

Stocks are one of the most popular ways for companies to compensate their highly valuable employees. Stocks provide a great cashless option both for employees and employers. Various different types of stocks can be used by the employer, such as ISO, NSO, and RSU.

Every type of stock has different rules and regulations for taxation. In this post, we will discuss how RSU and RSU taxation work. It is good to know the tax liability of your stock option, even if you are hiring an accountant for freelance workers to manage your taxes.

What is an RSU?

RSU stands for Restricted Stock Unit. It is a type of stock option that grants a fixed number of shares to the employee by an employer on the completion of their vesting schedule. It is an unsecured promise by an employer.

In some types of RSU plans, the employer allows a cash payment to be made in lieu of the stock, but most plans offer employees actual shares of the stock. With this type of stock, investors have no voting rights during the vesting period. RSUs work similarly to restricted stock in many aspects but are taxed differently and have different voting rights.

Restricted Stock

Restricted stock is a stock that generally becomes available to the recipient under a graded vesting schedule that lasts for several years. If we look at the definition of restricted stock, it is non-transferable and forfeitable stock that is granted to executives. Forfeiture conditions involve termination of employment or failure to meet corporate performance benchmarks.

This type of stock is subject to insider trading regulations under SEC Rule 144. If you fail to adhere to these regulations, it can also result in forfeiture of the stock. You can get in touch with a tax consultant for entrepreneurs to learn about this in detail.

What is RSU Taxation?

RSU taxation is easier to understand when compared to standard restricted stock plans. In RSU taxation, there is no actual stock issued. This means no Section 83(b) election is permitted, which in turn means there is only one date in the life of the plan on which the value of the stock can be declared.

The value of the stock reported is equal to the fair market value of the stock on the date of vesting. In this type of stock, the value of a stock is reported as ordinary income in the year the stock becomes vested.

The way RSU taxation works is very complex. That’s why even the top financial websites say one should contact an expert tax consultant to do the taxes and not consider their website’s general information as tax advice.