RSU, ISO and NSO Stocks & Taxation

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

There are many ways companies try to hold onto exceptional talent. Stocks are one of those ways. It allows companies to compensate their highly valued employees. Stocks provide a great cashless option for both employees and employers. Various types of stocks can be used by the employer, such as ISO, NSO, and RSU.

What is ISO?

 

ISO is an Incentive Stock Option that is applicable only to employees. This option cannot be used by company partners, vendors, and others who are not on the company’s payroll.

 

What is NSO?

 

NSO is a stock option that may go to employees, company partners, and others that are not on the company’s payroll. NSOs work like ISOs, but the major difference between an ISO stock and an NSO stock is how they are taxed. ISOs are subject to the capital gains tax rate, whereas stocks from NSO are subject to taxes twice: first, when an NSO stock is exercised and, second, when the stock is sold. The tax treatment of ISO results in fewer taxes.

 

What is 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 of the plans offer employees actual shares of company 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 RSU accounting is different from restricted stock and has different voting rights.

 

What is 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 your stock shares.

Every type of stock has different rules and regulations for taxation. It is good to know the tax liability of your stock option. You can get in touch with a tax consultant for entrepreneurs to learn more about this, in detail!

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Created on Jan 25th 2022 06:39. Viewed 230 times.

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