Tax season is on the horizon. Incentive programs can make taxes higher, particularly those involving allocations of stock in a company. Employees who receive company stock as part of their compensation may be immediately on the hook for taxes on that income. However, offering phantom stock instead of traditional stock helps workers avoid the immediate tax burden.
Taxes and Phantom Stock
Instead of actual company stock with its immediate tax implications, your privately held company is able to introduce a phantom stock program to your team. With this program your employees get the long-term benefits of owning stock without any actual ownership of the company. It's basically a promise that they'll be paid as if they own shares, based on how well the company does, but they don't get the actual stock certificate. Without a stock certificate, this isn’t considered income until the payout is made.
There are some specific tax implications for employees who opt into a phantom stock program that should be communicated:
- Being granted phantom stock doesn’t usually result in immediate taxes. Taxes are only paid when an employee actually receives the money.
- When the payout is received, it is taxed like general income and not capital gains. It is simply considered part of the employee’s salary.
- Upon vesting, phantom stock could be subject to Social Security and Medicare taxes. It is important to check with a tax professional if this isn’t automatically paid.
Deferred taxable income can be a strong incentive to offer potential employees. They have promises of additional income without having to pay taxes on it right away.
Making Management of a Phantom Stock Program Easy
Taxation levels depend on how the phantom stock program is implemented. The program’s structure can change how much an employee might owe in taxes. Reins offers a framework to help simplify this decision called the Modern Agreement for Rewards & Equity (MARE). This framework is built specifically for independent businesses, easy to set up, affordable, and flexible, offering the benefits of ownership without the complexity.
The MARE puts at your fingertips the tools needed to implement and guide a phantom stock program. It allows you to easily manage your plan and incentives with simple tools to track awards, grant new ones and keep plans in compliance. Though, businesses should always first consult with their legal and tax team to ensure these programs are a fit for their specific needs.
