Stock-based Compensation

  • Published: November 1, 2021 — 12:54 pm

It takes a team, doesn’t it? Every startup that gets to scale has key employees and contractors who make the magic happen. To keep top team members, and keep them happy, many companies adopt stock-based compensation (SBC) plans to provide incentive and reward so when the company grows, so does everyone’s stake in its continued success. There are four common types of SBC—

  • Restricted Stock Awards (RSAs)
  • Restricted Stock Units (RSUs)
  • Nonqualified Stock Options (NQSOs)
  • Incentive Stock Options (ISOs)

The first three may be granted to employees or independent contractors; ISOs are restricted to employees.

Each type of SBC has four key dates that have different implications for tax treatment—the dates of the Grant, Vesting, Exercise, and Disposition. Grant is the date the award is given; Vesting is when the stock can no longer be forfeited by the recipient; Exercise is when the recipient exercises their option to acquire the stock; and Disposition is when the acquired stock is sold.

Below is a brief summary of how each SBC plan is treated for tax purposes. These are general dates and facts, please consult with your VPTax Tax Director to determine which plan may make the most sense for your business.

RSAs

Grant date – no income to the employee/contractor unless an 83(b) election is made

Vesting Date – income is recognized by the employee/contractor and any applicable payroll taxes should be withheld if the stock has value and the employee doesn’t pay for the stock.  If the employee does pay, no income tax consequences.

Exercise Date – not applicable to RSAs

Dispostion Date – employee/contractor will recognize capital gain/loss on their personal income tax return

RSUs

Grant date – no income to the employee/contractor

Vesting Date – income is recognized by the employee/contractor and any applicable payroll taxes should be withheld

Exercise Date – no income to the employee/contractor

Dispostion Date – employee/contractor will recognize capital gain/loss on their personal income tax return

NSOs

Grant date – no income to the employee/contractor unless an 83(b) election is made

Vesting Date – no income to the employee/contractor

Exercise Date – income is recognized by the employee/contractor and any applicable payroll taxes should be withheld

Dispostion Date – employee/contractor will recognize capital gain/loss on their personal income tax return.

ISOs

Grant date – no income to the employee

Vesting Date – no income to the employee/contractor

Exercise Date – no income to the employee/contractor

Dispostion Date – employee/contractor will recognize capital gain/loss on their personal income tax return