How Are Restricted Stock Units Taxed?

John, a white man with brown hair and blue eyes, wears a blue jacket, white shirt, and blue tie. By John G. Hodnette

Employers often issue incentive stock to employees to promote retention and performance. Restricted Stock Units or “RSUs” are one of many ways to do so. Unlike similarly named restricted stock, an RSU does not initially provide the recipient with any ownership in the corporation. Rather, they are a contractual obligation of the employer to issue stock to the holder of the RSU once the RSU vests. It is only upon the issuance of stock that the RSU holder is taxed. Therefore, a Section 83(b) election is not possible or necessary for RSUs, unlike restricted stock.

Once an RSU vests, the corporation issues stock to the RSU holder. That results in compensation income equal to the fair market value of the issued stock at the time of issuance. The corporation receives a corresponding deduction. Like other compensation income, the issuance of stock is subject to withholding of income and FICA taxes.

The employer is generally required to make the stock payment within two and a half months after the end of the year in which the RSU vests. Without that requirement, the employee may be subject to the 20% penalty tax imposed by Section 409A. Where the transfer of the stock is required within that time limit, the exception for short-term deferrals in Reg. § 1.409A-1(b)(4) prevents the penalty tax.

A recipient’s holding period for the stock begins on the day of receipt. The stock is a capital asset with a basis equal to its fair market value on the issuance date. The recipient may receive long-term capital gain or loss on the future sale of the stock if the recipient holds it for more than one year.

Some RSU plans may provide for a cash payment to the recipient equal to the value of the stock on the date of vesting. A recipient is taxable on such cash as compensation income.

John G. Hodnette is an attorney with Fox Rothschild in Charlotte.