Restricted stock: RSUs and RSAs

Companies can compensate you in the form of restricted stock units (RSUs) or restricted stock awards (RSAs). These are "restricted" because there are conditions that must be met (such as length of employment or performance goals) before the shares vest. Upon vesting, the ownership of the shares shifts to you, and they're deposited into your account.

Shares that vest based on performance goals are referred to as performance stock (PSUs or PSAs).

Ahead, we'll cover:

1. How restricted stock is taxed
2. How to sell your shares
3. Cost basis and tax forms
4. Common questions about restricted stock

Taxes come into play twice: first, when the shares are delivered to you, which is typically when they vest, and then again when you sell them.

Note: This section refers to U.S. taxation. International tax filers may have different obligations.

RSUs

Taxes upon delivery
You will pay ordinary income tax on the fair market value of the stock, which is determined by your company and typically based on the market price of the stock upon delivery.

Taxes upon selling
When you sell your shares, you will incur a capital gain or loss, depending on whether the value of the stock increased or decreased. If you had a gain, you will be subject to capital gains tax.

If you sell your shares within one year of receiving your shares, they are subject to short-term capital gains and will be taxed at your income tax rate. If you sell your shares more than one year after you receive them, they're subject to long-term capital gains and will typically be taxed at a lower rate.

Be sure to meet with a tax professional to discuss your specific situation.

RSAs

The tax rules are similar for RSAs, with one potential tax benefit. RSAs let you take advantage of the 83(b) election, which allows you to report the stock award as ordinary income in the year it's granted rather than the year it vests. This is advantageous if you anticipate making significantly more income and falling into a higher tax bracket in the future. Note: You need to make the election within 30 days of the grant.

Keep in mind, you'll need to complete the IRS 83(b) form and mail it to the IRS within 30 days of your grant date. Additionally, you'll need to mail a copy of the completed form to your employer.

Prior to selling any shares, you'll want to carefully consider the tax consequences and your personal financial situation. For advice, consult a tax advisor or a financial consultant.

When filing your taxes, it's important to be mindful of the cost basis you report. Cost basis is the fair market value your company assigned to the shares at vesting. Using the correct cost basis ensures that you file correctly and aren't taxed more than the required amount. Refer to this cost basis sheet to help you determine the cost basis on your stock plan transactions so you can file your taxes accurately.

1. What is a vesting schedule?

   Vesting schedules are often time-based, requiring you to work at the company for a certain period before vesting can occur. Here's an example of how vesting might work: You are granted 500 RSUs. Your vesting schedule spans four years, and 25% of the grant vests each year. At the first anniversary of your grant date—and on the same date over the subsequent three years—125 shares vest.

2. How does an RSU become a share?

   After vesting, companies release shares of common stock to the employee. Once this happens, you can hold or sell the shares just like you can with any other kind of stock.

3. What's the difference between an RSU and an RSA?

   With RSAs, you may have voting and dividend rights because your employer sets aside actual shares upon the grant. RSUs, on the other hand, are more like a promise to pay out shares or their equivalent value in cash. No shares are set aside upon the grant, so you don't have the same rights to voting or dividends as with a restricted stock award, but some do allow a dividend equivalent paid in cash.

4. How do I view my restricted stock?

   You'll need to log in to your Schwab One^® brokerage account and select "Equity Awards" from the upper navigation bar on the Accounts page to view your award details.

5. What happens to my restricted stock when I leave the company?

   If you leave your company, vesting may stop and you may forfeit any unvested shares. You should review your grant agreements or consult with your former employer regarding terms and conditions on vested and unvested equity awards.