How is restricted stock taxed?

 When restricted stock is granted in exchange for some kind of past or future services (which is almost always the case), the United States Internal Revenue Services considers the fair market value of the stock (less any amounts paid for the stock, which is usually zero) taxable compensation.  (If the recipient is located in another country, this entire discussion may not be applicable and you should get local tax and securities advice before making an award.)  And because restricted stock is almost always subject to a “substantial risk of forfeiture” (subject to vesting, that is), the recipient may elect, within 30 days of grant, to make a “section 83(b) election” with the IRS. More on section 83(b) in a moment. And of course, as with any equity compensation, Section 409A of the Internal Revenue Code may be implicated. 

 If the recipient accepts the award and does nothing else, at grant there is no taxable event for the recipient or the company.  But when part of the award vests, the recipient pays ordinary income tax, and company receives deduction, on the fair market value of the vested portion, valued on the vesting date (not the grant date). So if the value of the company and the shares rises between the grant date and the vesting date, the taxes will also go up.  And just because a restricted stock award vests does not mean the stockholder will have cash to pay the taxes – if the company is not publicly traded, the stockholder probably won’t have liquidity and will have to find another way to satisfy the tax man.  This can be a terrible surprise for people who don’t understand the tax rules and don’t plan ahead.