There is no doubt that the technology field is growing quickly. As more and more employees decide on high-tech careers, the need increases for accounting professionals who understand the intricacies of tax planning for today’s innovators.
Equity compensation is one way that new tech companies recruit and retain innovators in the field. How this impacts the tax planning process for high tech employees is based on how the equity compensation process is set-up and which products are offered.
Equity compensation is a fairly technical subject, which is complicated when dealing with tech-industry issues. In order to understand how tax planning is affected by equity compensation, it’s helpful to understand the basics.
The Basics of Equity Compensation
Equity compensation is a tool that many start-up tech companies use to recruit employees and build a culture of ownership. Start-up capital is often scarce, thus equity compensation plans helps fill the gap.
Equity compensation allows employers to provide non-cash compensation in the form of ownership interest in the company. This can be a great incentive for hard-working tech employees. If you are an employee who has accepted equity compensation, you should understand these three tax related consequences.
Employee Equity Compensation Tax Planning
Though the practice is becoming increasingly more common, especially in the tech world, it’s likely that you will have questions about equity compensation. You should understand three areas:
- Is the stock vested?
- If not, when it will become vested?
- What are the tax consequences if shares change hands in a transaction between unrelated persons?
- Is the stock, or other property, subject to withholding?
- If yes, withholdings must be paid in cash.
Employees who are offered equity compensation are not considered stockholders and do not share the same rights. The tax consequences vary based on the type of compensation offered, so it’s important for you to understand the specific rules that may apply to your situation. Certain equity compensation options have specific tax advantages and reporting requirements.
Receiving equity compensation provides access to ownership opportunities that might not otherwise be available to those outside the company.
If you are considering accepting equity compensation, let the professional accountants at Ernst Wintter & Associates LLP help you in your tax planning. We work hard to empower our clients with the financial knowledge needed to make important financial decisions. Contact us by phone at (925) 933-2626 or email us at info@winttercpa.com to learn more about how we can help.
