Stock Based Compensation Plan Taxation

When you sell your stocks after holding them for less than a year at a profit, you will be taxed at the rate equal to your income tax rate but when you sell them after holding them for more than a year, you will be taxed at 15%. Still a lot when you have gotten a huge chunk of stocks from your company as a compensation right?

The taxes imposed on equity based compensations are poorly understood and have varying tax consequences. We can summarize the accounting of stock based compensation plans as:

  • A limited amount of stock options are allowed by the Internal Revenue Code that has special tax treatment. Employees are exempt from taxes when they get qualified stock options. The employers are not liable for the tax but the employees are liable for long and short term capital gains once the options are exercised.
  • Terms and conditions applied, non-qualified grants may be structured as options, restricted stock unit, stock appreciation rights and other arrangements. The taxes on intrinsic value are recognized as soon as the employee recognizes the income from the award. The difference in the time between tax and financial reporting results in deferred tax asset recognized for the company over the period.
  • When a recipient of non-qualified restricted stock awards chooses to pay income taxes based on fair market value at the grant date, an increase in the stock price subsequent to grant date are taxed at capital gain’s rates.
  • Some of the equity based compensation instruments may undergo the purview of IRC Section 409 ‘a’ causing additional potentially compensatory tax. Equity based compensation plans generally help in reducing and avoiding these situations.

Here at focus we help you develop a plan to pay your stock based compensation taxes in an efficient way. Why let go of all that profit you’ve earned as a reward of all the hard work you’ve done in order to reach to this level?

At focus we provide the following services to reduce the liabilities for stock based compensations:

  • ESPP feasibility assistance and preliminary valuation
  • ESPP appraisal review
  • Fairness opinions for ESPP installations, plan terminations and other material financial events
  • Complex ESPP transactions and financing structures
  • ESPP related litigation and dispute resolution
  • ESPP sponsor company
  • Annual ESPP plan valuations