Considering Offering Company Stock To Your Employees? What Tax Implications Could You Be Facing?

Posted on: 7 June 2016

If you're the owner of a publicly-traded business, you may spend quite a bit of your time focusing on how to attract and retain the best talent. High levels of employee turnover can harm your business's ability to provide continuity of service to customers, and it's often much easier (and less expensive) to hang on to a happy and productive employee by offering certain perks rather than seeking out and training a replacement. While many of today's hottest tech companies have a laundry list of employee perks that include on-site babysitting, spa services, and even arcade games, you may have your eye on a less flashy but more financially prudent option -- the issuance of company stock to your employees. Read on to learn more about the potential tax implications both you and your employees may encounter upon the adoption of an employee stock purchase plan (ESPP) or the issuance of stock in lieu of a cash bonus.

What are your options when it comes to giving stock to employees?

As owner (and with the approval of your company's shareholders), you are free to give stock to employees without requiring any purchase. You may opt to give each employee a certain number of shares on their annual employment anniversary, their birthday, or in lieu of a bonus payment. While this won't have much of a tax impact on your business (and may even lower your taxes by decreasing the revenue you'd ordinarily receive through the sale of stock), it could impact your employees' taxes -- particularly if this stock gift is their first foray into investing. At the end of the calendar year in which the stock is gifted, your employees should receive a 1099 form detailing the value of this "miscellaneous income" and will be required to pay taxes on the face value of the stock. If your employees choose to sell this gifted stock, they'll be liable for taxes on any gains, and if your company issues periodic dividends, your employees may be taxed on this amount even if they choose to hold onto the stocks themselves.

While gifting stock to employees can be a great way to establish loyalty and reaffirm their commitment to your company, doing so without taking some measures to lessen the tax blow could actually wind up harming your employees more than it helps them. 

When should you establish an ESPP instead of giving away stock?

One alternative to giving away stock is the establishment of a qualified or nonqualified ESPP. These plans permit employees to purchase company stock at a discounted rate under certain conditions.

A qualified ESPP has some strict rules with regard to eligibility but provides a number of tax advantages for employees who choose to participate. The tax protection provided by a qualified ESPP is similar to that provided by a traditional IRA, and can give money-minded employees an additional vehicle in which to save for retirement.

A non-qualified ESPP has fewer rules and restrictions but also doesn't carry the same tax advantages as a qualified ESPP. Your employees may be taxed on the difference between their discounted purchase price and the "market price" of your stock on the day of purchase. Although the amount subject to tax should be significantly less than if your employees were gifted the stock outright, dealing with the valuation of shares of company stock at tax time may make a non-qualified plan a less appealing option. 

For more information, contact Wiggins, Smit, Burby, Reineke, & Company P.A. or a similar firm.