For an update on this development, see our July 15, 2020 post here.

The IRS has issued a General Legal Advice Memorandum (GLAM 2020-004) that could increase the audit risk and exposure for late deposit penalties for companies granting stock-settled restricted stock units (“RSUs”) and either (i) not making their next-day employment tax withholding deposits with the IRS within one day of when they request their transfer agent to transfer shares underlying the RSU award to the employee or (ii) not treating the fair market value of the shares as includible in an employee’s income on such date. The IRS’s next-day deposit rule requires employers to remit employment taxes to the IRS within one business day after an employer accumulates $100,000 or more of employment taxes on any given day. 

Key Changes for RSUs

For RSUs that are settled upon vesting, the GLAM takes the position that on the date the employer “initiates payment” under the stock award:

  • the fair market value (“FMV”) of the shares underlying RSUs is both includible in income for Code Section 83 purposes and subject to federal income tax withholding, and
  • if the next-day deposit rule applies, income taxes and FICA applicable to the RSUs would be required to be remitted to the IRS within one business day of such payment initiation date. 

Note, however, that the GLAM does not announce any new view on the timing of income inclusion for FICA taxes on RSUs, citing the “special timing rule” in Code Section 3121(v)(2)(A) under which FICA on RSUs generally applies on the RSU vesting date, but may be paid at a later date during the same tax year by application of the rule of “administrative convenience.”

With regard to income taxes, the GLAM states that an employer is considered to “initiate payment” under an RSU when the employer makes a request to its transfer agent to transfer shares underlying the stock award to the RSU holder. As it generally takes up to two business days for the transfer of the RSU shares to the employee from the date the employer instructs the transfer agent, under the rules proposed by the GLAM, the FMV of the shares underlying an RSU would become includible in income before the date on which the employee actually receives the shares in his or her brokerage account in settlement of the award. And the employer’s withholding obligation and the next-day deposit rule would be triggered prior to the date that the shares are reflected in the employee’s brokerage account. Notably, compliance with the GLAM will create cash flow challenges for employers that satisfy tax withholdings by means of selling RSU shares because they would need to advance the payment of the withholding taxes prior to the time the RSU shares are sold and the sale proceeds are available.  

To reach these conclusions under the applicable Treasury Regulations and IRS guidance, the GLAM needs to show that it is as of the “payment initiation” date of an RSU that an employee has both beneficial ownership of the shares and also has received actual or constructive payment of the shares. However, instead, the GLAM cites to authorities that are either not on point (e.g., Rev. Rul. 79-305 relating to restricted stock, an entirely different form of award where shares are delivered at grant) or which demonstrate that an RSU holder in fact does not have actual or constructive receipt of shares prior to settlement (e.g., Rev. Rul. 78-185, a ruling relating to a matching share-style stock purchase plan, which holds that “the excess of the fair market value of the stock on the date of the crediting of such stock to the employee’s account over the amount of the employee’s contribution is “wages” for purposes of FICA, FUTA, and income tax withholding”).

Options and SARs

The GLAM also addresses the taxation of options and stock-settled stock appreciation rights (“SARs”), confirming prior IRS guidance that an option is includible in income upon exercise and extending such position to SARs, and concluding that, for both options and SARs, it is on the exercise date that the employer’s obligation to withhold income and FICA taxes arises and the next-day deposit rule is triggered.

Share Valuation

From a share valuation perspective, it would be administratively impractical to meet the next-day employment tax deposit rules the GLAM outlines if the closing price of the shares on the date of payment initiation of RSUs (or exercise of a SAR) were required to be used to calculate the tax withholding obligations. However, the GLAM did not expressly prescribe the valuation method that must be used to calculate the income and tax withholding obligations. Therefore, based on existing informal guidance from the IRS, it should be possible to rely on a reasonable valuation method, such as the closing price (or opening price, for that matter) of the shares on the date prior to vesting or payment initiation of RSUs (or exercise of SARs) to determine the amount of the tax withholding obligations, so long as the valuation method is applied consistently by the company.

Main Takeaways

Although the conclusions of the GLAM, particularly with respect to RSUs, do not appear supported by existing law, employers should be aware that if they do not meet their next-day deposit rule obligations within one business day following the payment initiation date of an RSU or exercise of a SAR, they could be liable for steep penalties, ranging from 2% of the applicable deposit of the failure is for not more than five days, 5% if the failure is for more than five days but not more than 15 days, and 10% if the failure is for more than 15 days. The same risk does not appear to apply to option exercises as the GLAM states that it is not intended to affect the application of the administrative waiver the IRS previously made available for options, whereby IRS examiners were instructed not to challenge the timeliness of tax withholding deposits related to the exercise of stock options if the taxes are deposited within one day of settlement, so long as settlement occurs within three days of the exercise date (T+3). 


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.


Anne Batter is a partner in Baker McKenzie's Tax Practice Group with over 35 years of tax experience. She focuses her practice on the tax treatment of executive compensation and fringe benefits arrangements. She also handles excise tax matters, particularly those involving the air transportation excise tax. She previously served as an attorney in the Income Tax & Accounting Division of the IRS’s Office of Chief Counsel and as attorney-advisor with the US Tax Court.