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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 tha

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.

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.