Performance stock units (PSUs) and performance stock awards (PSAs) are ways your employer can grant you equity in the company. They're awarded based on achieving a performance target set by your company within a specific time period. The value may be adjusted based on meeting different levels of the performance goal.
Your company will grant you a set number of performance shares up front, which is called a target amount. Awards are subsequently adjusted up or down based on your company's performance or your individual performance. Typically, the better your company performs, the more shares you'll receive.
- How performance stocks work
- How performance stocks are taxed
- Cost basis and tax forms
- Common questions about performance stocks
How performance stock works
Performance stocks focus on the performance of your company as measured by specific business goals during a set period.
These grants can be in the form of PSAs, but they are most commonly in the form of PSUs. A PSU is a promise from your employer to award you shares at the vesting date (which is the date when you get full ownership of the shares) and after the performance has been certified. A PSA, on the other hand, is granted in advance of the vesting date. However, like PSUs, PSAs are not delivered to you until they vest and the performance has been certified.
Both PSAs and PSUs vest—or deliver the shares—upon your company meeting predetermined performance goals. Vesting is dependent on meeting goals within a defined timeframe.
If your company meets the goals established at the outset of the performance period, you will receive the target number of shares specified in the initial agreement. If your company far exceeds the target, you might be awarded a greater number of shares. This sliding scale method means you will not be certain of the number of shares you'll receive until the performance period ends and the shares vest. Participants also can receive fewer shares than the target amount—or even no shares.
After the vesting date and once the performance has been certified, your company will release shares of stock to you. Then you can sell the shares or hold them as part of your investment portfolio.
How performance stock is taxed
You are taxed when the shares are delivered, which is almost always at vesting. You'll be taxed again on any additional gains when you sell the shares.
Taxes upon delivery
When your shares vest, they are assigned a Fair Market Value (FMV) and taxed as ordinary income. Your employer should report this value on Form W-2 or other relevant tax documents, and it will be subject to income tax.
In most cases, your employer will withhold income taxes. Your employer will either hold back cash or stocks depending on the rules of your company's plan.
Taxes upon selling
When you sell your shares, you may incur a capital gain or loss, depending on whether the value of the stock increased or decreased. You will be subject to capital gains tax if your stocks increase in value, which is calculated by the appreciation over the market price of the shares on the vesting date.
If you sell your stock within one year of receiving your shares, they are subject to short-term capital gains and will be taxed at your income tax rate. If you sell your shares more than one year after you receive them, they're subject to long-term capital gains, which usually are taxed at a lower rate.
It's important to meet with a tax professional to discuss your specific situation.
PSAs are taxed similarly to PSUs. However, PSAs also let you use the 83(b) election to report the stock award as income in the year shares are granted rather than when they vest. This election allows you to pay all the ordinary income tax upfront, so you won't be taxed again until you sell the shares. You need to make the election within 30 days of the grant.
Note: This section refers to U.S. taxation. International tax filers may have different obligations. Learn how taxation works in your country with our Global Tax Guide, which you can access while logged in to the Equity Award Center.
Cost basis and tax forms
When filing your taxes, it's important to be mindful of the cost basis you report. Cost basis is the fair market value your company assigned to the shares at vesting. Using the correct cost basis helps ensure that you file correctly and aren't taxed more than the required amount. Refer to this cost basis sheet to help you determine the cost basis on your stock plan transactions so you can file your taxes accurately.
Those who sold shares will receive IRS Form 1099-B.
5 common questions about performance stock
What happens to my performance stock when I leave my company?
Leaving your job almost always stops vesting. The only exception occurs in certain situations when vesting may be allowed to continue or may even be accelerated (e.g., death, disability, or retirement, depending on your plan and grant agreement).
How do you calculate the value of performance stock?
Calculations used to value performance stock differ. Ask your company’s plan administrator for information on how they calculate the percentage of shares you’ll receive once they vest.
How is performance stock different from restricted stock?
Performance stock is like another type of equity compensation called restricted stock. The key difference is in how vested shares are calculated. With restricted stock, the company agrees to grant a set number of shares regardless of company performance. The number of shares granted in a performance stock program fluctuates depending on the performance of your company.
How does performance stock differ from stock options?
Stock options give employees the right to purchase company shares at a certain price. Performance stock grants shares to employees usually at no cost.
Can performance stock be transferred to another person?
Most companies don't allow employees to transfer performance stock to another person before the award vests and performance is certified. However, some may allow employees to designate a beneficiary in the event of their death.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.
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