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Tax time isn't just a season for stock plan participants
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When tax season is in the rearview mirror, employees with compensation arrangements involving equity grants through stock-based plans may think the worst is behind them. But the other side of April 15 is no time to rest. Instead, it's time to start preparing for taxes that will be paid next year, advised Adam Colón, vice president of corporate services at financial services firm E*Trade in Atlanta.
“Every day, the delay can result in more stress down the road,” Colón told
Well-informed employees who start planning early, taking into account expected income and stock plan vesting for the year ahead, will have a distinct advantage come next tax season, and HR professionals should encourage such advance planning, he advised.
Executives and others who receive
equity-based compensation should take time to understand the standard tax deductions for stock plans. “Companies often only withhold the minimum taxes for stock plans, subjecting employees to tax bracket discrepancies and leaving them responsible for making up potentially significant differences in tax payments,” Colón said.
Below are Colón’s responses to several key tax-planning questions about equity compensation.
What pay records should employees be saving this year to speed up and improve their tax experience next year?
Colón: Employees should be saving confirmation statements and any other substitute statements provided by their stock plan provider or employer. Saving confirmations may seem obvious, but it is so easy to overlook during the course of one’s day, week or quarter. Carving out time at regular intervals, or doing them as part of their continuous stock plan investing, will go a long way.
How can employees avoid some of the common tax-planning mishaps related to equity compensation?
Colón: Equity compensation grants can make taxes tricky, but if your employees start early they have better chances of steering clear of common mishaps. Double-counting restricted stock income is one of the most common mistakes employees make today, simply because current Form 1099-Bs don’t account for taxes potentially withheld already. Keeping track of additional documentation, such as previous confirmation statements, can help ensure employees don’t pay taxes on amounts paid in the previous year.
Another common mistake stock plan participants make is not taking advantage of the tax benefits of incentive stock options or qualified employee stock plan purchase programs, or confusing disqualified with nonqualified dispositions. If specific requirements are met, any gain or loss resulting from the sale or other disposition of the underlying securities is treated as a long-term capital gain or loss. Otherwise, disqualified dispositions are subject to taxable ordinary income. Many can find themselves literally leaving money on the table.
How can or should HR professionals effectively communicate this advice?
Colón: Benefit fairs are a great way to offer employees tips on stock plan best practices. Companies should also consider leveraging the expertise of their stock plan providers, who can help carry the load during educational seminars or webinars for employees.
Is this advice limited to executives and other highly compensated employees?
Colón: These challenges can have an impact on any employee who receives or participates in an equity compensation program. That said, the larger the grant being exercised, the larger the potential tax impact, which makes it all the more important to be mindful of taxes throughout your year. Tax time should not be thought of as a season. The time to start thinking about taxes starts the moment the year begins.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on
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