Question

When an ER compensates an EE with restricted stock, when is the compensation taxable?

A. When the EE sells the stock
B. At the end of the next quarter
C. When the risk of forfeiture ends
D. At the end of the year

Answer 1

Option (C), Compensation from restricted stock is taxable when the risk of forfeiture ends, which is typically when the stock vests.

Step-by-step explanation:

When an employer (ER) compensates an employee (EE) with restricted stock, the compensation is taxable when the risk of forfeiture ends. This event is known as vesting. At this point, the employee has earned the right to the stock, and it cannot be taken away under the terms of the vesting schedule. This means the correct answer is C) When the risk of forfeiture ends. The income recognized is typically the fair market value of the stock at the time it vests, and this is what will be included in the employee's taxable income for that year.