EQUITY COMP INFO

Question 1

Restricted Stock Unit (RSUs)

Answer 1

A restricted stock unit (RSU) is an award of stock shares, usually given as a form of employee compensation. The recipient must meet certain conditions before the restricted stock units are transferred to the owner.

Restricted stock units are issued to employees through a vesting plan and distribution schedule after they achieve required performance milestones or upon remaining with their employer for a particular length of time.

Question 2

RSU Taxation

Answer 2

Restricted stock units give employees interest in their employer’s equity but have no tangible value until they are vested. The RSUs are assigned a fair market value (FMV) when they vest. Restricted stock units are considered income once vested, and a portion of the shares is withheld to pay income taxes. The employee then receives the remaining shares and has the right to sell or keep them.

• For tax purposes, the entire FMV of vested RSUs must be included as ordinary income in the year of vesting.

Question 3

Employee Stock Options

Answer 3

• equity compensation given by companies to some employees or executives that effectively amount to call options
• give the employee the right to buy the company’s stock at a specified price for a finite period of time. Terms of ESOs will be fully spelled out for an employee in an employee stock options agreement
• When a stock’s price rises above the call option exercise price, call options are exercised and the holder obtains the company’s stock at a discount. The holder may choose to immediately sell the stock in the open market for a profit or hold onto the stock over time

Question 4

ESO Taxation

Answer 4

ESOs are taxed at exercise and stockholders will be taxed if they sell their shares in the open market

Question 5

RSO Non Qualified

Answer 5

non-qualified stock options (NSOs) are stock options that are offered to all levels of employment. Non-qualified stock options are not given preferential tax treatment. It is because non-qualified stock options profits are taxed as ordinary income

Question 6

RSO Non Qualified Taxation

Answer 6

• taxable upon exercise
• mkt price minus stk price = ordinary income subject to payroll tax

Question 7

RSO Qualified (Incentive Stock Option)

Answer 7

incentive stock options (ISOs) are stock options that are mainly offered to important employees or upper management. Incentive stock options are given preferential tax treatment. It is because incentive stock options profits are treated as long-term capital gain
- non transferable

Question 8

RSO Qualified (Incentive Stock Option) Taxation

Answer 8

market price minus stock price = income not subject to payroll tax
- After you exercise ISOs, if you hold the acquired shares for at least two years from the date of grant and one year from the date of exercise, you incur favorable long-term capital gains tax (rather than ordinary income tax) on all appreciation over the exercise price

Question 9

LATE DEPOSIT PENALTIES: Employment Tax Related to Restricted Stock and Stock Options

Answer 9

• Tax withholding in excess of $100,000 on wages arising from employee vesting of restricted stock needs to be deposited with the IRS by the next business day. 18
• Tax withholding in excess of $100,000 on wages arising from employee exercise of stock options needs to be deposited by the business day after the settlement date. The settlement date takes place three business days after the employee exercises the stock options.19
• Failure to timely deposit withholding tax results in a penalty.20
• The penalty amount is graduated based on the lateness of the deposit, with a minimum late deposit penalty of 2% and a maximum late deposit penalty of 10% if the deposit is more than 15 days late.21
• Due to the mechanics of the process, Payroll does not receive complete and final data to calculate the actual deposit amount until after the deposit is due
• 18. Treas. Reg. Sec 31.6302‐1(c)(3), IRC Sec 7503.
• 19. March 14, 2003 IRS Field Directive “Assertion of the Penalty for Failure to Deposit Employment Taxes.”
• 20. IRC Sec. 6656(a).
• 21. IRC Sec. 6656(b).

Question 10

Sec 162(m)

Answer 10

• deductibility of executive comp
• prior to 2017 tax act $1M deduction limit (excluding pay for performance such as stk options) to each of top 5 paid
• 2017 TCJA removed the exemption for commission and performance based pay