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Date Posted: 11/19/2014

What is Restricted Stock Compensation?

By Stefan Schumacher, editor of The Payroll Blog

Restricted stock differs from stock as compensation in that it is usually provided to key, highly compensated employees. 

It is nontransferable and subject to forfeiture under certain conditions, such as if an employee is no longer with the company or if the employee fails to meet either corporate or personal performance benchmarks. 

Restricted stock generally becomes available to the employee under a vesting schedule that could last for several years. This type of stock is a popular alternative to stock options, particularly for executives, due to favorable accounting rules and income tax treatment.

As the employer, you have the ability to place restrictions on the stock that can limit the employee’s receipt of this form of compensation. Since restricted stock is generally made available to already highly compensated employees, some employers consider it important to also provide some type of comparable program to other employees so they feel like they have a vested interest in your company’s success as well. 

How Does Restricted Stock Affect Payroll?

The stock value is subject to federal income tax withholding either in the year that the substantial risk of forfeiture ends, or the year that the restricted stock is granted, assuming the employee opts to recognize the stock’s value as income. 

Restricted stock is also subject to Social Security, Medicare and Federal Unemployment Tax Act (FUTA) taxes in the year that an employee performs the related services, or when the substantial risk of forfeiture ends, whichever happens later.


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