Restricted stock units (RSUs) and stock grants are often used by companies to reward their employees with an investment in the company rather than with cash. As the name implies, RSUs have rules as to when they can be sold. Stock grants often carry restrictions as well. How your stock grant is delivered to you, and whether or not it is vested, are the key factors when determining tax treatment.
Restricted stock units
A restricted stock unit is a substitute for an actual stock grant. If your company gives you an RSU, you don't actually receive company stock. Rather, you receive units that will be exchanged for actual stock at some future date. Typically, the date you take ownership of the actual shares, known as the vesting date, is based on either time or performance.
When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
Stock grants
With a stock grant, a company provides you with stock shares rather than a unit that gives you a future right. However, this doesn't always mean you're immediately free to sell the shares. Many stock grants have a vesting period, during which you may still lose the rights to the stock.
Only when you are fully vested in the stock do you have 100% ownership rights to do with the stock as you please. As with RSUs, stock grants typically vest after a period of time, or after certain performance measures are met. You're not liable for income tax until your stock grant vests, at which point you must report income equal to the value of the stock you received.
Selling your stock
You'll likely have to pay taxes again if you sell stock you received through an RSU or a stock grant. After you take ownership and pay the income tax on the fair value of your stock, you treat the stock for taxes the same as if you bought the stock on the open market. Here are the different ways you can be taxed:
- If you sell the stock at a higher price than its fair value at the time of vesting, you'll have a capital gain
- If you hold the stock for one year or less, your gain will be short term, and you'll owe ordinary income tax on it
- If you hold the stock for more than a year, your gain will be long term, meaning you'll pay tax at the more favorable capital gains rate
Paying your taxes
Since stock you receive through stock grants and RSUs is essentially compensation, you'll usually see it reported automatically on your W-2. Typically, income taxes are withheld to go against what you might owe when you do your taxes. As with all withholding, the taxes your employer deducts from your paycheck may not be enough to cover the full amount of tax you owe when you file your return. In addition to income taxes, your RSU income reported on your W-2 is typically subject to payroll taxes.
If your employer doesn't withhold tax, or enough of it, on your stock grant or RSU, you may be responsible for paying estimated taxes. With estimated taxes, you'll have to send payments to the IRS about every quarter, typically on April 15, June 15, September 15 and January 15 of the following year. The payments are estimates of what you'll owe in total when you prepare your tax returns for that year.
For example, if you get a huge stock grant in February, you'll be expected to pay estimated taxes for that grant on April 15, if there is no employer withholding. However, if your next stock grant isn't until December, you might not need to send estimated payments in June or September.
If you don't want cash withheld from your paycheck, you may be able to pay the tax by having your employer take it out of the shares. For example, if you need 10% tax withheld and receive 100 shares of stock, your employer may be able to liquidate 10 shares and give you a net grant of 90 shares.
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FAQs
Income in the form of RSUs will typically be listed on the taxpayer's W-2 in the “Other” category (Box 14). Taxpayers will simply translate the figure listed in Box 14 to their federal tax return and, if applicable, state tax return(s).
How do I report RSU on tax return? ›
When you receive an RSU award, you don't actually own the stock until it vests. Accordingly, there is nothing to report at the time of the award. Once the stock has vested, the fair market value of the stock gets reported as ordinary income, usually in box 1 of your W-2.
How are RSU stock grants taxed? ›
When you receive an RSU, you don't have any immediate tax liability. You only have to pay taxes when your RSU vests and you receive an actual payout of stock shares. At that point, you have to report income based on the fair market value of the stock.
How do I report incentive stock options on my taxes? ›
The advantage of an ISO is you do not have to report income when you receive a stock option grant or when you exercise that option. You report the taxable income only when you sell the stock.
How are stock option grants taxed? ›
The receipt of these options is immediately taxable only if their fair market value can be readily determined (e.g., the option is actively traded on an exchange). In most cases, however, there is no readily ascertainable value, so the granting of the options does not result in any tax.
Are RSU grants taxed as income? ›
RSUs: RSUs are generally taxed as ordinary income at the time of vesting based on the fair market value of the shares on that date. Employees are responsible for paying income tax (and employment taxes) on the value of the vested RSUs. Any subsequent capital gains from selling the shares are taxed as capital gains.
Why are RSUs taxed twice? ›
When each RSU is sold, it is taxed as capital gains. Capital gains covers the amount that you have profited on the sale of the stock above and beyond the value that it held when it first vested. It is worth noting that being taxed twice means you made money twice.
Do I need to report 1099-B for RSU? ›
Yes, you need to enter both your W-2 and the 1099-B into TurboTax. There are two different types of transactions being reported. Your W-2 is reporting income from your stock vesting (which is compensation).
How is RSU reported on W-2? ›
If you have RSUs the amount should be shown in box 14 of your W-2 copy. This amount should also be included in the wages (box 1) of your W-2. Box 14 is used by employers to list various items and there is not a standard list of codes, you can use the options for "Other Not Listed Here" in place of RSU Gain.
How to avoid double tax on RSU? ›
Instead, supply proof of the true cost basis of the restricted stock unit so you only pay taxes on what you owe. Some documentation may include the following: Records from your company supporting the vesting date and number of shares. Supplemental data on the 1099-B stating the cost basis.
Similar to RSUs, stock grants will typically be reported on your W-2 form. You will likely see the stock grant listed under Box 14 as “Other” income. If the employer withheld sufficient funds to cover the taxes owed, no other action should be required.
Do I need to include form 3921 on my tax return? ›
Form 3921 Exercise of an Incentive Stock Option Under Section 422(b), is for informational purposes only and should be kept with your records. It does not need to be entered into your return unless you still hold the stock at year end (if you do, see the previous information regarding Alternative Minimum Tax (AMT)).
What is the difference between RSU and incentive stock options? ›
When you're granted stock options, you literally have the “option” to purchase company stock at a specific price before a certain date. Whether, and when, you actually purchase the stock is entirely up to you. RSUs, on the other hand, grant you the stock itself once the vesting period is complete.
How do you record a stock option grant? ›
When the stock options are granted, the total stock option compensation expense is calculated as the fair market value of the stock options x the number of options granted. The company would debit stock option compensation expense and credit “equity APIC – stock option”.
How are stock grants accounted for? ›
Outright Grants
Compensation expense is reported based on the stock's fair value (the market value) on the grant date. The shares are fully vested, and the company allocates the compensation expense over the service period, which is presumed to be the current period, unless other requirements are in place.
What is the difference between a stock option and a grant? ›
A stock grant provides the recipient with value—the corporate stock. By contrast, stock options only offer employees the opportunity to purchase something of value. They can acquire the corporate stock at a set price, but the employees receiving stock options still have to pay for those stocks if they want them.
What is box 14 of W-2 for RSU? ›
How To Read RSUs on Form W-2. The value of RSUs is typically recorded in Box 14 of the W-2, which is labeled "Other." Box 14 doesn't have a standard list of codes, thus allowing employers to enter any description they like. You might see the value of your vested stock followed by "RSU."
Do I report sell to cover RSU on taxes? ›
After the taxes are withheld, they need to be paid in to the government and reported on a form. If they weren't reported on your W-2 form the only other likely form they would be reported on would be a 1099-B form, which may have been generated reporting the stock sale.
What tax documents do you need for RSU? ›
Step-by-Step Guide to Reporting RSUs on Tax Returns
- W-2: This one reports the income you've paid to employees, including vested RSUs. Make sure to report the fair market value of the shares at vesting.
- 1099-B: Issued by your brokerage, this form reports the sale of RSU shares. ...
- Form 1040: The granddaddy of them all.
There are no standardized codes for box-14 because the federal government doesn't provide standardized codes for box 14 items, so employers can assign their own code that adequately describes the reported item. Be sure that your chosen codes are clear to avoid any confusion for employees.
