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The Ultimate Offer Guide
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The Ultimate Offer Guide
Introduction

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Tax Implications

Any form of income (salary, bonus, equity) will have tax implications. It’s important to educate yourself on those before accepting an offer and planning for what’s to come.

Salary tax rates (ordinary income tax)

Most employers will at minimum compensate you with a base salary, which is likely to be at an hourly or annual rate. Tax rates for salaries are considered ordinary income tax and may vary based on your income bracket and the state in which you reside. It’s important to recognize and understand this upfront. You may be in the midst of an upcoming move which can impact this rate and your ultimate take home pay.

Bonus tax rates

Some employers will offer you a bonus on top of your salary. This may be a one time signing bonus, or an annual bonus with a percentage target, or both. In most, if not all states, bonus compensation is subject to heavy taxes. These taxes are far higher than your typical tax rate for your base salary. Keep this in mind anytime you anticipate a bonus, as your ultimate payout for that bonus will be significantly different than the amount awarded by your employer.

Equity tax rates

Equity compensation can be one of the most valuable benefits offered by your company, but it’s important to understand how it works, and how it’s taxed.
One of the keys to successfully building wealth over time is making sure you’re able to retain much of what you earn, and that requires paying attention to the tax impact of all of your financial decisions. Among the biggest of those financial decisions is the way that you manage your compensation from equity awards.
Understanding how equity compensation impacts your taxes is an important step in using that equity to help you meet your financial goals. Anyone who receives equity based compensation may find it to be one of the most valuable and complex things, especially when it comes to how it’s taxed. The type of equity compensation and the length of time you hold the actual shares will impact the tax treatment of your equity compensation, and determine whether you may owe ordinary income tax, alternative minimum tax, and/or capital gains tax (both short term or long term).
Different types of equity compensation have different tax rules. The first step is knowing what kind of equity compensation you’re dealing with, as that will have an impact come tax season. Two common types of equity awards include stock options and restricted stock units (RSUs).
Stock options give employees the right to purchase shares at a pre-determined price within a fixed period of time. Stock options typically come in two variations: incentive stock options (ISOs) and non-qualified stock options (NQSOs). The difference between the two is that you may owe taxes only at sale or at both exercise and sale, respectively. You typically don’t owe taxes on ISOs when you purchase (exercise) your options, but you generally must include the difference between the exercise price and the fair market value (FMV) at exercise in your alternative minimum tax (AMT) calculation that year. NQSOs are much simpler, in that there is no AMT calculation. For NQSOs, the difference between the exercise price and the FMV of the stock at exercise is taxed as ordinary income. Additional taxes may apply when you sell the shares in the future.
Restricted stock units (RSUs) are a promise from your company to deliver those shares to you after they vest. Upon RSU vesting, you’ll owe ordinary income tax on the FMV of the shared delivered to you, and your company will likely withhold applicable taxes at vest and delivery. Additional taxes may apply when you sell the shares in the future.

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Final thoughts

No matter what type of equity you receive, it’s highly recommended that you work with a professional tax advisor to understand how your equity impacts your particular tax situation. The tax treatment of equity compensation is complex and may be subject to additional rules and exceptions that you may be unaware of. It’s important that you understand the types of taxes you may be subject to when you receive equity, provide the right documents to your tax preparer to submit an accurate annual tax filing, and know how you can use equity value gains (and losses) as part of your winning financial game plan.
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