Restricted Stock

| October 01, 2017
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Restricted Stock

If you are fortunate enough to receive restricted stock from your firm, it’s important that you understand the basics of this benefit.

A restricted stock plan is where shares of a company's stock is transferred to an employee, usually at little or no cost to the employee, with certain “restrictions”. In general, these restrictions are designed to prevent the employee from selling the stock.

The restrictions make the employee forfeit the stock if he or she fails to keep the terms of the restricted stock program. An example of this would be if the employee leaves employment within a certain number of years.

As an owner of restricted stock, the employee will have voting and dividend rights. But, the employer is considered to be the owner of the restricted stock, for federal income tax purposes, until the stock becomes unrestricted - meaning until after the forfeiture restrictions have expired.

Let’s give you an example: Say XYZ Corporation transfers 8,000 shares of restricted stock to its employee, Mary, for $7 a share, while the current market price of XYZ's stock is $40 a share. The restrictions are that Mary has to sell the stock back to XYZ Corporation for $7 a share, IF she leaves the company within 5 years of the date the shares were transferred to her. So Mary has to work for XYZ for five more years to get unrestricted ownership of the stock.

After the restricted stock becomes unrestricted, the taxes can launch Mary into a higher tax bracket. To get around this problem, the stock agreement between the employer and employee, can have the restricted stock vest over several years. This way both Mary's taxes, and the employer’s compensation deduction, can be spread over this time period as the vesting occurs. This will hopefully keep Mary from being thrown to the ceiling on taxes.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

 

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