When do I have to pay taxes if I'm given stock options for services?

Is the company stock listed publicly? Where do you live? Options are different to actual stocks. Be careful.

I’m in Ohio and the company isn’t public.

Then, I’d say, you’re being taken advantage of. Unlisted companies stock value has a very ethereal value. You’ll want to take into account how long the company has been in business and what it’s balance sheet looks like. They gave you a balance sheet, right? Probably not. Without a current balance sheet, for all you know the stock option is worthless and they are over leveraged

As far as I understand, stock ‘options’ are a gamble… even in listed companies. The company is offering you the ability to purchase stocks at a future date. From the sounds if it, they don’t have the capital to back any sort of share distribution at the moment, but are promising to do this in the future, somehow. You will want to know how they are doing this. (sale of current assets, bringing on a capital investment firm, borrowing against current assets….) but you want SOLID intrinsic value behind this offer. Otherwise, it’s a hollow, pointless promise.

Those options have no value until you actually purchase and sell them. They can not currently be valued, so you have no idea how much you have been paid, if anything. Also, you should find out if they are considered as stock or salary. Capital gains are taxed at a different rate from earned income. Who knows the value of the stocks prior to any (hypothetical) gain?

I’m just guessing, but if were the IRS (and thank goodness I’m not), I would charge income tax on the amount up to the IPO price, and then capital gains tax on any gains you have made when you sell the stocks.

If you have to pay for the stock options at the IPO price, then you don’t pay the income tax, since there is no income, and all you have is the capital gains tax.

But I’m not an accountant, nor am I the IRS, so you should check with an accountant first.

I made a mistake. The company wants to grant me stock, not options. Will taking the stock give me tax implications next year before a liquidity event?

I don’t know if stock is taxed in the states or just dividends paid. Here in Norway, the entire value of your assets (car, stocks, balance in bank account as at 31 Dec) are taxed as assets. I think that is different in the US. If you have stock and then they pay a dividend, that is taxable, or if you sell the stock, that income is taxable….but I’m REALLY hairy on Capital Gains tax in the US…. if the VALUE of the stock increases, but is not realised…(meaning you don’t cash it in..)... over the 12 month period… is THAT taxed? or not until you cash it in… THEN you have to pay capital gains tax on it…??? I hope I’m not muddying the waters for you.

That was an interesting editing issue. :-)

So you’re getting equity in a private company and you’ll have no liquidity for a year or even two? Is that what’s happening?

If so…is the company an LLC?

Yes it’s a grant of restricted stock I believe. And yes they’ll have no liquidity this year and possibly next. It’s an S Corp in Ohio. Thanks.

Alright. It really depends on how the grant is designed. If you have the opportunity to defer the payment until the liquidity event, you may defer the taxable event BUT the award may be subject to 409A limitations (ask for clarification if necessary). If the grant is of restricted stock straight up, then the taxable event occurs when the stock vests in you, and you will receive the value of the stock as it was on the date of the grant.

This means, however, that you also need to know how the stock is going to be valued.

So if you have vested equity, then it’s taxable in the year of the grant. If you can defer it, you need to watch out for 409A.

I believe they will have to give you a valuation for the stock, and you will have to show that stock at that value as untaxed income, as if you “purchased” it. When you go to sell the stock or show it as a loss, that will be your base value.

This article may be helpful.