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Understanding the Tax Implications When Giving Employees Equity

April 16, 2022
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Amid news of the “Great Resignation,” which refers to the phenomenon of employees leaving their jobs in record numbers, businesses are smart to think through how they can incentivize employees in new and interesting ways—and for businesses that are publicly traded or plan to be in the future, gifting employees stock or private equity may sound like a smart way to do so.

In some cases, gifting employees stock can be a smart incentive solution…but not always. As with any decision surrounding finances, it is important for businesses to make sure they fully understand the tax implications that come along with gifting employees stock so that you do not find yourself susceptible to unwanted tax consequences as a result of your generosity.

Tax Considerations When Giving Employees Stock

As far as the IRS is concerned, there is no true way for employers to give a gift to employees, as every value item will be considered income during tax season—and stock is no exception. When employers give stock to employees, the recipient will be required to pay income tax on it, while the business will be required to pay payroll tax. These two things can quickly devalue the stock transfer, both for the employer and the employee.

Tax Considerations When Selling Employees Discounted Stock

Unfortunately, providing a discount on stock to employees has the same tax considerations as outright gifting it. Unless the sale is part of an Employee Stock Purchase Plan, the IRS will still consider the stock to be taxable income for the employee, while the employer will have to pay payroll tax on the value of the stock, minus the amount that the employee paid for it.

Options for Incentivizing Employees With Stock

Stock Option Plans: Stock options are a form of compensation that are typically tied to an employee’s tenure. Employees are given the option to purchase stock at a predetermined price for a specific period of time, which typically starts at a certain milestone of the employee’s career (i.e. three years with the company).

Employee Stock Ownership Plans (ESOP): An ESOP can be a smart corporate-finance strategy to align the interests of shareholders and employees, while providing key tax benefits for each party. As part of an employee’s remuneration package, employees hope to see the stock do well, and the company can hold the provided shares in a trust until employees retire or resign.

If you would like to learn more about the tax implications of stocks, we would love to chat! Contact us today to learn more about how we can help your business plan for the future.