Grant

• When a company grants a restricted stock award to an employee, it allocates a specific number of shares to the employee, subject to the vesting criteria and vesting schedule. For example, a company might issue an award of 1,000 shares of restricted stock on January 1, valued at $20 per share, and designate that 25 percent of the award vests on each of the dates March 31, June 30, September 30 and December 31. When the grant occurs, there is no tax event for the employee because no real compensation is provided until the award vests. There is no withholding and no reporting of income to the IRS for the grant.
  
  

Ownership

• While the company may designate the employee as the owner of unvested shares of restricted stock, the IRS does not. Any dividends earned on unvested shares should be paid to the employee as ordinary income and reported on a W-2. Employees can typically vote their unvested and vested shares in the proxy.
  
  

Vesting

• When all or a portion of a restricted stock award vests, an employee has a tax event. The value of the restricted shares is calculated by multiplying the share price on the vesting date by the number of shares that vest. This is reported as ordinary income paid to the employee, even if he doesn't sell the shares. For example, if the stock price was $25 on March 31 and 25 percent of a 1,000 share award vests on March 31, the compensation to the employee would be 250 shares times $25, or $6,250, taxed as ordinary income.
  
  

Withholding

• Employers may be required to withhold compensation when a restricted stock award vests. Since the award is in the form of shares, the employee may have to pay the withholding from other resources. Many employers will calculate the number of shares required for withholding, sell those shares to pay the withholding and provide the remaining shares to the employee.
  
  

Section 83b Election

• A recipient can file a Section 83b election within 30 days of receiving a restricted stock award and choose the tax treatment for vested stock rather than restricted stock. This could be favorable if the stock appreciates substantially during the vesting period, since vested stock is valued and taxed at the time of grant for ordinary income and the appreciation is taxed at the capital gains rate when the stock is sold. For example, if a company grants 1,000 shares of restricted stock at a price of $3 per share with a vesting period of two years, and at the end of the two years, the stock is valued at $50 per share, the restricted stock would result in ordinary income of $50,000 and income tax of as much as $17,500. With a Section 83b election, ordinary income would be reported as $3,000 at the time of the grant and the $47,000 appreciation would be taxed at the much lower capital gains tax rate.