What is the difference between rsu and psu

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is a Restricted Stock Unit? Understanding RSUs. Special Considerations. Advantages and Disadvantages. Examples of RSUs. RSUs vs. Stock Options? Key Takeaways Restricted stock units are a form of stock-based employee compensation.

RSUs are restricted during a vesting period that may last several years, during which time they cannot be sold. Units are just like any other shares of company stock once they are vested. Unlike stock options or warrants, RSUs will always have some value based on the underlying shares.

The entire value of vested RSUs must be included as ordinary income in the year of vesting for tax purposes. Pros Incentivize employees to stay with the company Employees receive capital gain minus value of shares withheld for income taxes Minimal administrative costs. Cons Don't provide dividends Aren't considered tangible property so employees can't pay tax before the vesting period Don't come with voting rights. Article Sources. Investopedia requires writers to use primary sources to support their work.

Restricted stock is treated like any other issued and outstanding stock when it comes to entitlement to voting and dividend rights—the major difference is the existence of restrictions on sale or transfer until the stocks vest.

The dividends from restricted stock may be distributed as cash when paid or may be accrued and paid only after the award vests completely. For private companies, when the employee is initially granted the RSU or RSA, the company should reasonably estimate the fair value of the stock. This is often done by getting a valuation of the company and dividing by the number of outstanding shares to get share value.

For a detailed explanation of the valuation process for stock compensation, read our Valuation article. Valuation is a critical step for companies preparing to IPO in the future, since recording compensation expense based on bad calculations could be challenged by auditors when attempting to go public.

Compensation expense will be recorded over the vesting period for RSUs, RSAs, and Options, with no initial financial statement impact on the grant date. Additionally, the company must make certain required disclosures.

These include key information such as the nature and terms of the arrangements, the effect of compensation expense on the income statement, how the initial fair value measurement was made on grant date for private companies , and the cash flow effects arising from the agreement. If the employee leaves the company before the vesting date or does anything that would forfeit his or her right to the shares, no compensation expense is required to be recognized.

Any previously recorded compensation expense and deferred compensation would be reversed. For more detailed accounting implications about vesting methods, conditions, and classification please see our Accounting for Stock Compensation article. In addition to the financial statement impacts, it is important to be aware of the tax impacts resulting from different types of equity compensation. This next section will explain the tax implications of RSUs and RSAs and share some unique options to private companies.

Employees generally have no voting or dividend rights connected with the stock, so the employee will not recognize any taxable income until the shares are transferred. Once the shares vest restrictions lapse they are transferred, and the recipient will include the full stock or cash value as ordinary income.

Employers will receive a deduction equal to the fair market value of the RSUs in the year the vested shares are transferred to the employee. Private companies have a unique problem with RSUs. When the RSUs vest and the recipient owes taxes on the income recognized, it is much more difficult to sell some shares to pay the taxes because the company is privately held. This defers the recognition of income and duty to pay taxes until the company can turn the shares into cash, allowing the recipient to bear the tax burden.

This method is commonly used by private companies. The new 83 i tax election comes from the Tax Cuts and Jobs Act of and enables RSU recipients to defer paying taxes up to 5 years if several requirements are met. Although this election provides some clear benefits by deferring income, small employers should understand the administrative burdens and requirements before offering this election to employees.

Some of the stringent requirements include the following:. Employee recipients of restricted stock will exclude the value of the stock from taxable income during the vesting period, unless they elect otherwise. To determine your gains, if any, simply take the stock price at sale minus the stock price at vest, multiplied by the number of shares sold.

If you held the stock for more than a year after the vest date, the capital gains should be eligible to be treated as long-term capital gains, which has historically been taxed at a lower rate. Any losses you incur are not taxable, and may even be deductible.

Any dividends received on your shares are typically considered income and are treated as such in the year they are received. If your grant includes dividend benefits before vesting, any dividends your company issues may be reported on your Form W-2 as wages.

If you make a Section 83 b election described below , your dividends may be reported on a DIV, or, if you are not an employee of the company, your dividends may be reported on a MISC. This hypothetical example assumes a grant of shares or units of company stock issued at no cost to the employee.

Please keep in mind that these examples are hypothetical and for illustrative purposes only. Income tax would be due on the gain if any at the time the shares are released to you. Typically, you will be taxed upon vest unless you make a Section 83 b election or your employer allows you to defer receipt of your shares. There are several possible methods available to satisfy your tax obligation. You should check your plan documents to determine which tax payment method s are available to you.

Types of payments include:. Your employer keeps a portion of the shares to pay taxes. The remaining shares if any are deposited to your account. Shares sufficient to cover the taxes are sold and the remaining shares if any are deposited to your account.

To select your desired tax payment method, log on to etrade. From the Stock Plan Overview page, click on Account. Customer Service is available Monday to Friday, 24 hours a day, online at etrade. From outside the US or Canada, go to etrade. One of our dedicated professionals will be happy to assist you. Understanding restricted and performance stock. How do restricted stock and performance stock work? Know the types of restricted and performance stock. US tax considerations.

Taxes at vest The value of your shares when they vest, less the amount you paid for the shares, is treated as ordinary income.