According to a 2012 article published by Reuters, more employers are paying their employees with restricted stock awards instead of heavily criticized stock options. Based on accounting rules at that time, restricted stock has a lower financial impact on corporate revenue than stock options. If you received a restricted stock award, your employer must follow some rules when reporting it on your annual W-2.
Normally, you don’t pay taxes on your stock grant when you receive it. However, you must pay taxes when the shares are vested, at which time the value of your shares is treated as ordinary income. In the taxable-wages boxes of your W-2, your employer includes the difference between the value of your grant upon vesting and its fair market value minus any payment you made for the grant when you received it.
Your employer must also include the taxes it withheld on the fair market value of the award in the respective withholding tax boxes of your W-2. When your shares vest, your employer must withhold Medicare and Social Security taxes from the fair market value. When you actually receive the shares, your employer withholds federal and applicable state and local income taxes. If vesting and your receipt of the shares happen at the same time or in the same year, your W-2 should show your Medicare, Social Security and income tax withholding amounts.
Section 83(b) of the Internal Revenue Code gives you the option to modify how your restricted stock award is taxed. Under the code, your employer adds the fair market value of the award, excluding any amount you paid for it, into your gross income at the time you receive the grant. Your employer also withholds taxes from the grant when you receive it. Therefore, you don’t pay taxes when the shares finally vest. In the taxable wages boxes of your W-2 for the year you received the grant, your employer includes the grant’s fair market value minus any amount you paid for it. It also puts your taxes withheld in the relevant withholding tax boxes of that same W-2.
Restricted stock comes in the form of a grant of company shares, which you cannot sell or transfer until the vesting requirements are fulfilled. During this restriction period, you’re entitled to receive dividends on the stock. Your employer must include your dividends in your taxable compensation on your W-2. The withholding boxes on your W-2 should include the taxes withheld from your dividend payments. If you elected Section 83(b), your dividends are taxed immediately and should show on your W-2 for the year you receive the dividend payment. If you didn’t elect Section 83(b), your dividends are paid and taxed when your shares are vested. In this case, they should show on your W-2 in the year your shares are vested.
In Box 14, labeled “Other” on your W-2, your employer may specify the amount of restricted stock that’s in your taxable wages boxes. Your taxable wages include all forms of compensation you received, including your salary and the restricted stock. By stating your stock amount in Box 14, your employer makes it easier for you to comprehend how much of the amount in the taxable wages boxes represents the award.
- Reuters: Analysis --- Despite Crunch, BNY Mellon Is a Stock-Option Contrarian
- Morgan Stanley Benefit Access: Filing Your Tax Forms After Selling Your Restricted Stock
- MyStockOptions: Restricted Stock and RSUs On Tax Returns -- How To Avoid Costly Mistakes
- MyStockOptions: Restricted Stock -- Basics
- IRS.gov: Wages, Salaries and Other Earnings
- Humana: Investor FAQs
- IRS.gov: 2013 Form W-2
- National Center of Employee Ownership: GPS -- Restricted Stock and Restricted Stock Units