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> According to The Wall Street Journal, Stripe would not use the money toward operating expenses but rather to cover a large annual tax bill associated with emp

> According to The Wall Street Journal, Stripe would not use the money toward operating expenses but rather to cover a large annual tax bill associated with employee stock units. How does this work exactly, I'm not to keen on these sort of financial matters. Why would the company have to foot the tax bill for the employee's stocks. What's going on here?

pavlov 4y ago
Assuming Stripe’s stock compensation is RSUs (restricted stock units)… The employee received a stock grant that vests according to a schedule: for example, every 3 months after an initial 12-month waiting period. On each vesting date, the employee receives N shares. But this is taxed as ordinary income, which means the company should be withholding taxes accordingly. This is not a problem if the stock is publicly traded. The stock is liquid and it has an unambiguous valuation. If the employee’s tax withholding rate is 40%, the company can immediately sell 40% of the shares on the public market, use that to pay the taxes, and the employee actually receives 0.6*N shares. If the stock is not public, paying the tax is a problem because the stock can’t be sold immediately. Yet it has a market value as evidenced by how much investors were willing to pay for it in funding rounds. If you receive 100 shares of Stripe, and each share was worth $100 in the last private sale, the tax man sees that as $10,000 of income. How do you pay the income tax if you can’t sell 40 shares? I believe this is why Stripe is arranging a private sale. The money goes into paying employee’s tax bills, and the shares come from their vests.
- mytailorisrich 4y ago
  Tax on RSUs is on the employees' side because all the liability is theirs. So usually either the scheme allows them (not the company) to sell a number of shares to cover their tax liability, or they need to shell out the cash, which the scheme may allow to be taken from their salary. Neither should impact the company. But as you write, it's tricky to sell shares if the company is not publicly traded. So perhaps the company has agreed to buy back shares in order to enable employees to easily sell them to cover their own tax liability, which may be what you are suggesting by 'private sale'.
  - philjohn 4y ago
    Not everywhere. In the UK there's also employers NIC to pay, and depending on the details of the stock plan it's either payed by the employer (more common from companies I've worked at) OR by the employee.
    - mytailorisrich 4y ago
      That's nitpicking. That's specific and a relative small amount, which schemes indeed often make the employees liable for. If the company has to borrow to fund these things either the liability is relative large (e.g. because they do as I suggested), or... frankly I'd worry that they can survive at all because they are effectively borrowing just to be able to make payroll.
- dboreham 4y ago
  Could you clarify who is paying the employees' income tax liability? I get that the employer has a duty to withhold employee taxes, but are they also paying that tax? If so wouldn't that represent even more taxable income to the employee, and yet more taxes due? Or does the company just facilitate the employee paying their tax liability, through giving the employee in effect 0.6N in stock and 0.4N as cash? fwiw ianaa but I believe the employer does pay employer payroll taxes on some/most stock compensation transactions.
  - pavlov 4y ago
    Under the standard GAAP accounting rules, stock-based compensation is a non-cash expense on the company’s income statement. So even though it appears the company isn’t actually paying anything when it issues new stock grants to employees, from an accounting POV the company is paying for it all. (This is why so many growth tech companies report non-GAAP income. The amount of stock-based compensation tends to be so large that it overshadows any profit from product revenue, and executives understandably would rather talk about their margins and retention rates than how expensive RSUs are.) I don’t know how this affects the tax situation. I would assume that since the RSUs are already booked as an expense, the company can sell 40% of them to get cash, and use that to pay the employee tax withholdings, with no effect to the employee.
  - ergocoder 4y ago
    Employees will pay tax on the RSUs which are not liquid. The new development here is that Stripe will buy 40% of the RSUs of every employee.
  - IG_Semmelweiss 4y ago
    It depends on how the RSU agreements are structured, the company could withhold the 0.4 in income taxes even if the employee expects to hold on to the stock. Don't forget that the company, and not the employee, controls the issuance of shares. This means that the can distribute 1, .6, or 0 (in exchange for $$$) of RSU stock to staff. If they do choose to distribute 1 share , it does spark the question that you raise, but since we are talking withholding income, I don't believe that triggers more income, since you aren't paying more to the employee, instead, you are only covering your responsibility as an employer. Its the company's fault that it didn't withhold, that doesn't mean the employee got paid more. I could see "tax covering" being a problem with the IRS if done when there is certainty with the withholding amount , but in situations where the withholding is unknown and the cash has been used up by the time the tax bill comes due, the company is on the hook and there isn't any extra ordinary income. Companies do send bill to staff to try to recover the shortfall sometimes for this reason.
- charcircuit 4y ago
  You can just take out the tax from the person's salary like any other tax on the income you give an employee

pavlov 4y ago

Assuming Stripe’s stock compensation is RSUs (restricted stock units)… The employee received a stock grant that vests according to a schedule: for example, every 3 months after an initial 12-month waiting period. On each vesting date, the employee receives N shares. But this is taxed as ordinary income, which means the company should be withholding taxes accordingly. This is not a problem if the stock is publicly traded. The stock is liquid and it has an unambiguous valuation. If the employee’s tax withholding rate is 40%, the company can immediately sell 40% of the shares on the public market, use that to pay the taxes, and the employee actually receives 0.6*N shares. If the stock is not public, paying the tax is a problem because the stock can’t be sold immediately. Yet it has a market value as evidenced by how much investors were willing to pay for it in funding rounds. If you receive 100 shares of Stripe, and each share was worth $100 in the last private sale, the tax man sees that as $10,000 of income. How do you pay the income tax if you can’t sell 40 shares? I believe this is why Stripe is arranging a private sale. The money goes into paying employee’s tax bills, and the shares come from their vests.

mytailorisrich 4y ago
Tax on RSUs is on the employees' side because all the liability is theirs. So usually either the scheme allows them (not the company) to sell a number of shares to cover their tax liability, or they need to shell out the cash, which the scheme may allow to be taken from their salary. Neither should impact the company. But as you write, it's tricky to sell shares if the company is not publicly traded. So perhaps the company has agreed to buy back shares in order to enable employees to easily sell them to cover their own tax liability, which may be what you are suggesting by 'private sale'.
- philjohn 4y ago
  Not everywhere. In the UK there's also employers NIC to pay, and depending on the details of the stock plan it's either payed by the employer (more common from companies I've worked at) OR by the employee.
  - mytailorisrich 4y ago
    That's nitpicking. That's specific and a relative small amount, which schemes indeed often make the employees liable for. If the company has to borrow to fund these things either the liability is relative large (e.g. because they do as I suggested), or... frankly I'd worry that they can survive at all because they are effectively borrowing just to be able to make payroll.
dboreham 4y ago
Could you clarify who is paying the employees' income tax liability? I get that the employer has a duty to withhold employee taxes, but are they also paying that tax? If so wouldn't that represent even more taxable income to the employee, and yet more taxes due? Or does the company just facilitate the employee paying their tax liability, through giving the employee in effect 0.6N in stock and 0.4N as cash? fwiw ianaa but I believe the employer does pay employer payroll taxes on some/most stock compensation transactions.
- pavlov 4y ago
  Under the standard GAAP accounting rules, stock-based compensation is a non-cash expense on the company’s income statement. So even though it appears the company isn’t actually paying anything when it issues new stock grants to employees, from an accounting POV the company is paying for it all. (This is why so many growth tech companies report non-GAAP income. The amount of stock-based compensation tends to be so large that it overshadows any profit from product revenue, and executives understandably would rather talk about their margins and retention rates than how expensive RSUs are.) I don’t know how this affects the tax situation. I would assume that since the RSUs are already booked as an expense, the company can sell 40% of them to get cash, and use that to pay the employee tax withholdings, with no effect to the employee.
- ergocoder 4y ago
  Employees will pay tax on the RSUs which are not liquid. The new development here is that Stripe will buy 40% of the RSUs of every employee.
- IG_Semmelweiss 4y ago
  It depends on how the RSU agreements are structured, the company could withhold the 0.4 in income taxes even if the employee expects to hold on to the stock. Don't forget that the company, and not the employee, controls the issuance of shares. This means that the can distribute 1, .6, or 0 (in exchange for $$$) of RSU stock to staff. If they do choose to distribute 1 share , it does spark the question that you raise, but since we are talking withholding income, I don't believe that triggers more income, since you aren't paying more to the employee, instead, you are only covering your responsibility as an employer. Its the company's fault that it didn't withhold, that doesn't mean the employee got paid more. I could see "tax covering" being a problem with the IRS if done when there is certainty with the withholding amount , but in situations where the withholding is unknown and the cash has been used up by the time the tax bill comes due, the company is on the hook and there isn't any extra ordinary income. Companies do send bill to staff to try to recover the shortfall sometimes for this reason.
charcircuit 4y ago
You can just take out the tax from the person's salary like any other tax on the income you give an employee