“I was planning to give three of my senior managers stock in my company, but one of them says he’d have to pay income taxes on the market value of the stock if he accepts. That seems crazy. Your advice?”
Mike: He’s right. If you give your managers stock, they’ll wind up paying taxes on the fair market value of the stock as of the day they receive it–which could create a staggering tax bill for them.
There are several ways to avoid the tax problem if you intend the stock to be a kind of bonus. You can give them “qualified options” to buy the stock some time in the future at its current price, so they’ll only be taxed on the gain (and only when they have the cash). Or you can give them “phantom stock,” which entitles them to a percentage of the eventual sale price of the business.
But if your plan is to give your managers real long-term equity in the business–well, the IRS considers that equity a form of income and will eventually expect to collect taxes on the whatever the equity is worth.
The ASK MIKE is a weekly column providing answers from finance and small business expert Michael Gonnerman. Mike has served as a trusted advisor to hundreds of technology CEO’s and investors as well as served on more than two dozen corporate boards.
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