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GPS: Restricted Stock and Restricted Stock Units
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Format: Saddle-stitched, 73 pages
Edition: 2013 edition (March 2013)
Status: In stock
Restricted Stock and Restricted Stock Unit Basics
Strategic and Tactical Design Issues
Tax and Payroll Issues
Changes of Employment Status
7.2. Overview of the Tax and Payroll Issues7.2.1. Tax and payroll issues are among the most complex and challenging areas of administration. When the risk of forfeiture lapses for a restricted stock award (normally at vest), the employee recognizes taxable gain equal to the FMV of the shares on the lapse date (or the difference between the FMV and purchase price if the purchase price was not $0). The Company is required to withhold federal, state, local, and FICA taxes on the taxable income. In addition, the Company must include the taxable gain as income in the employee's Form W-2. When restricted stock units vest, the FMV of the award is only subject to FICA, and when the units are released, the FMV of the award is subject to federal, state, and local income taxes. For purposes of this publication, we have assumed that the vest date and release date occur simultaneously. Therefore, FICA and income tax will be withheld at the vest/release date for restricted stock units. However, it should be noted that in other circumstances, the taxation of restricted stock units may be bifurcated. Controls associated with the withholding and reporting process are discussed in Questions 30, 31, 32 and 34.
7.2.2. Under ASC 718, tax withholding in excess of the minimum statutory requirements may result in the award being accounted for as a liability rather than an equity instrument,9 thereby resulting in less favorable accounting treatment. Controls associated with the minimum tax withholding requirements are discussed in Question 33.
7.2.3. A corporate tax deduction may be claimed for the ordinary income recognized by the employee associated with restricted stock and restricted stock units. Note - IRC Section 162(m) places limitations on the corporate deduction for certain highly-compensated employees. The accounting expense for the fair value of the award under ASC 718, which is determined at the grant date, includes an offset for the corresponding estimated corporate tax benefit, calculated at the appropriate corporate tax rate. When the actual taxable event occurs, the Company claims the actual tax deduction on the corporate tax return. In all likelihood, the actual tax benefit will differ from the previously recognized tax benefit; thus additional accounting adjustments may be required. Controls associated with the corporate tax deduction are discussed in Questions 34 and 35.A detailed discussion of the accounting implications of the corporate tax benefit is outside the scope of the publication. Controls associated with the reports for providing underlying data for the cumulative effect of the corporate tax benefit are discussed in paragraph 8.3, Question 37.