What Is the Taxable Event for RSUs?

Determining when restricted stock units are subject to tax can be a little trickier than for other types of stock compensation. This blog entry discusses the key principles that apply to this determination.

What Is the Taxable Event for RSUs?

GLAM 2020-004 provides guidance on the tax treatment of RSUs that are settled in stock upon vesting (the GLAM does not address RSUs that are settled in cash or that are subject to deferred settlement).

First, the GLAM notes that, for RSUs, the principles that govern timing of taxation for federal income tax purposes differ from those that govern FICA taxation. Let’s start with federal income tax.

Federal Income Tax: Payment Initiation Date

For FIT purposes, two conditions must be met for stock transferred in connection with the performance of services to be taxable:

1. The stock must be either transferable or no longer subject to a substantial risk of forfeiture (for RSUs paid out upon vesting, transferability and forfeiture restrictions are both lifted upon vesting).
2. The stock must be transferred to the individual providing services (e.g., the employee granted the RSU).

RSUs represent a promise to deliver stock to the award holder if the vesting conditions are met. Thus, the stock underlying an RSU award is not transferred to the award holder until the award has vested. As a result, for FIT purposes, RSUs are taxed when the underlying stock is transferred to the award holder (because, at that time, condition number 1 above will have already been met).

When is the stock considered to have been transferred to the award holder? According to the GLAM, the transfer of stock is considered to occur when the award holder has beneficial ownership of the stock. The GLAM defines this as the date that the company initiates the payment of stock underlying the RSU to the award holder.

The GLAM does not explain what constitutes initiation of payment of an RSU, but it gives an example in which the payment initiation date is the date the company instructs the transfer agent to issue the stock.

FICA: Lapse of Substantial Risk of Forfeiture

For FICA purposes, RSUs are subject to tax when no longer subject to a substantial risk of forfeiture. For RSUs that are paid out on vesting, this will also generally be the payment initiation date. But when RSUs are subject to deferred payout or nonsubstantive vesting (e.g., RSUs held by retirement eligible employees that provide for payment on or after retirement), the substantial risk of forfeiture will lapse before the award is subject to tax for FIT purposes

What Happens on the Taxable Event?

The taxable event serves two important purposes: 

• It is the date used to determine the value of the underlying stock for tax purposes.
• It starts the clock running for depositing the tax withholding with the IRS.

The same date must be used for both of the above purposes (although, on that date, it is permissible to define the FMV as the prior day’s closing price, which can give the company a head start on the tax calculations).

When Is the Tax Deposit Due?

Once the taxable event for an RSU has occurred, the deadline to deposit that taxes with the IRS will depend on the company’s cumulative deposit liability. If this amount exceeds $100,000, the deposit is due on the next business day. But I have some good news here. So long as the RSU payment is settled within two days of the payment initiation date, the IRS has instructed its auditors to treat the company’s deposit liability as accruing on the settlement date. This gives the company until one day after the settlement date to deposit the tax withholding.

For example, let’s assume the following dates in connection with an RSU vesting event:

• Vest Date: Monday, July 15
• Payment Initiation Date: Tuesday, July 16
• Settlement Date: Thursday, July 18

In this example, under the next-day deposit rule, the tax withholding must be deposited with the IRS by Friday, July 19.

If the next-day deposit rule isn’t triggered, the tax withholding can be deposited in accordance with the company’s regular deposit schedule.

Learn More

The session “What Is the “T” in T+1” at this year’s NASPP Conference will delve deeper into this topic, looking at when a transaction is considered to occur in equity awards under both IRS rules and the SEC’s settlement requirements. Register by July 26 for the early-bird rate!