When an employer compensates an employee with restricted stock, when is the compensation taxable?

The compensation for restricted stock is taxable when the risk of forfeiture ends. Until the risk of forfeiture is lifted, the employee does not have full ownership of the stock, which means they are not yet entitled to any inherent value or rights associated with the stock. This period is often defined by conditions set by the employer, such as time-based vesting or performance metrics that must be met.

Once the employee's rights to the stock are no longer contingent upon meeting certain conditions, the stock is considered vested, and the employee has a taxable event. At this point, the fair market value of the stock becomes part of the employee's income and is subject to income and payroll taxes. This concept is vital in understanding how restricted stock works in the context of taxation and is crucial for payroll professionals to navigate compliance and reporting requirements accurately.