Tax Withholding and Equity Compensation

Author: Chintamani

Author: Chintamani

Certain forms of equity compensation provided to employees require tax withholding. Many types can be offered to non-employees, such as board members or consultants, as well as to employees. Withholding for employees is required when you are issued vested stock or when previously unvested stock vests. Withholding is also required when you exercise a non-qualified stock option like an Incentive Stock Option (ISO). The problem you face when acquiring equity compensation that requires withholding, is that the IRS wants that withholding in cash, even though you are not being compensated in cash. Some companies attempt to help employees in this situation by offering a cash bonus or appreciation right along with your equity compensation. The problem here is that the IRS is going to look at the cash bonus or appreciate right as income, and tax it accordingly, as well. Tax experts refer to this situation as grossing up the payment. Most companies expect you to pay the withholding on any equity compensation and to pay them the cash to give to the IRS. You might have to write a check, make a withdrawal from savings, or even take out a loan against the value of the equity compensation. Another suggestion is to sell some of the stock you received and use the proceeds to satisfy the withholding requirement. Some companies may even agree to buy back the stock they issued to you. Also, be aware that your withholding might not cover all of your compensation income liability. Unless you have adjusted your withholding to fully cover this income, you might still owe taxes against your equity compensation at income tax time. Obviously, equity income is very complex and could cause you some serious tax liability issues, if you go into it unprepared. The best thing to do is to review all your options in regard to your equity compensation with an investment counselor or tax expert in order to determine how to best handle this sort of income compensation as it applies to your individual tax liability situation. Please note that if you are a non-employee receiving equity compensation for services, you will have to consider self-employment taxes when dealing with this sort of income in return for services rendered. The fact that self-employment taxes are often estimated and paid quarterly adds a whole new dimension to receiving equity compensation for non-employees. About the Author:

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. His famous Tax eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax. Just visit his website http://www.planningyourtax.com/ and claim your FREE eBook.

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