PSUs or performance shares are given to employees based on how well a company performs over a certain period, usually three years. The number of shares awarded depends on the success in key metrics for the business. If the overall performance exceeds expectations, more shares are given to the participants.
Taxing PSUs is similar to RSUs. Initially, there is no tax liability (taxes due). Income tax is triggered when the shares vest and are given to individuals. If the eventual sale price surpasses the shares' fair market value (FMV) at vesting, capital gains tax applies. It is also possible to delay the tax by placing PSUs into the company's NQDC plan.
Vesting is a retention tool that gives ownership or entitlement over time. The vesting schedule is predetermined and outlined in the company's stock plan. Once fully vested the employee has complete ownership of shares, and can sell or transfer stock. That is why most states do not have a tax liability upon purchase but at sale. So, for tax purposes, treat PSUs the same as RSUs to calculate any taxable capital gain at sale.
