There is typically no Form 1099 needed when paying an employee with stock—that type of compensation is considered part of the employee’s earnings, and it will be reported in the employee’s Form W-2. If you give stock compensation to employees, make sure to consult with your payroll provider so that it can be reported to the employee’s earnings.
There are different kinds of stock-based compensation and the manner of issuing shares to incentivize employees vary. Most common is issuing stock options and restricted stocks.
- Stock Options
The company issues rights to employees to buy stocks at a fixed price. These options are normally subject to vesting condition such as continued employment or achieve certain performance goals.
- Incentive Stock Options (ISO) are subject to a set of strict conditions. Once these are satisfied, the options will not taxable to the employee upon grant, vest or exercise. They will be taxable only when the stocks are sold to another party.
- Non Statutory Stock Options (NSO) are all options are are not ISOs. These are generally taxed on the date of exercise and included in the employee's Form W-2. These are also taxed as a capital gain or loss on the date the stocks are sold.
- Restricted Stock
The stock issued is subject to vesting and is forfeited if the vesting is not satisfied. During the vesting period, the stock is considered outstanding, and the recipient can receive dividends and exercise voting rights.
A recipient of restricted stock is taxed at ordinary income tax rates, subject to tax withholding, on the value of the stock (less any amounts paid for the stock) at the time of vesting. An employee needs to file an 83(b) election within 30 days (without extension) after the grant of restricted stock. In most cases filing an election is extremely advantageous to the employee/recipient in terms of tax planning.
inDinero does not generally prepare 83(b) elections, but you can reach out to your account manager for our recommended providers. Also, see our 83(b) Election article for more information.
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