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We are giving some employees fully vested options in lieu of cash comp for their bonuses. However, since they won’t have cash to pay a massive tax bill, we want to make sure that the option grant is a non-taxable event. Possible?
Dan’s Answer
Stock options are a truly amazing form of compensation. I am going to assume that your employees are in the US. I am also going to assume they are in a state that generally follows the IRS tax code (unlike, let’s say, Pennsylvania).
Stock Options generally only result in income to the holder once they are exercised AND vested. This means that when you give your employees fully vested stock options they will not have an income or tax event until they exercise them. Most people will not exercise them right away. But if they do…
Another important point. The income at the tim of exercise is equal to the difference between the grant/exercise price and the value of the stock on the day exercised. This means if you give someone a stock option with an exercise price of $1.00 per share and the stock on the day they exercise is worth $1.00 on the day they exercise they have no ordinary income, since there is no difference.
Lastly you can also give people stock options that allow exercises even when they are not vested. This ensures the options retain some “stickiness” and give the option holder some interesting tax planning potential