Equity compensation: Drive home the value of this valuable benefit during tax season

Over 20 million Americans receive some form of equity compensation, and that number most likely includes some of your top talent. The equity awards you offer can be one of the most valuable benefits in the workplace, and tax season is an important time to drive this value home. Your participants will be looking for ways to satisfy their tax obligations and keep as much of their equity awards as they can to build wealth and secure their financial future. How are you meeting them in the moment/?

One way is to offer mindful support when it comes to navigating the complex tangle of managing the impact equity awards can have on the overall bite of taxes. Of course, your company likely is not in the business of offering tax advice, but as we enter the home stretch of tax season, there is a lot you can do to help your top talent understand how taxes intersect with equity. Here are three key steps.

#1: Emphasize information and education

Education and communication are critical: We’ve found that while participants increasingly perceive equity compensation as valuable, they want more help. Less than half (46%) say they know how to reach someone to ask questions and just 39% say they understand how taxes might affect their stock plan benefits. No wonder over 60% said they are likely to attend an education session on investing, stock plan benefits, or retirement.

Related: Stock options tied to retention, but employees want more financial guidance

Meeting this demand for education and support is one of the most important moves employers and equity providers can make to improve the stock plan experience. Along with supporting employees to incorporating their workplace equity compensation into their general financial goals, it’s important to help them understand how the mechanics of their plan intersects with their tax obligation. By helping your participants learn how to maneuver through this tricky landscape, you can add even more value.  

#2: Delineate the details, from award type to typical tax rules

The tax treatment of an equity award depends on many factors, including the award type, how long shares are held, and how the underlying equity price performs. So right there, you have three foundational topics: award type, timing and tax principles, and volatility. Talk to your equity plan provider to see if they have educational content or ready-made communications programs to help spotlight these tax-related themes.

As you deploy educational webinars, program communications, and supplemental content to help participants dive deeper, boil it down to key themes:

• There are many tax strategies for managing equity compensation. There is a difference between offering tax advice and providing key information and context for your equity participants, so make it clear that while you can provide a roadmap, participants must choose their own path. That said, you can illuminate the concepts behind popular strategies without recommending any specific course of action. For example, you can explain the thinking behind tax-loss harvesting, timing the exercise of stock options, and donating appreciated stock to charity as potential strategies to reduce an income tax bill. Many of these strategies are complex, so it’s also important to help participants understand the importance of working with a tax advisor.
• Different types of equity are subject to different tax rules. Even the experts sometimes need a refresher on how different types of equity work and how taxes are determined. For example, stock options come in two variations, and taxes may be due only at sale or at both exercise and sale depending on whether they are Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs). Meanwhile, Restricted Stock Units (RSUs)are typically subject to ordinary tax income at the time of vesting, while the taxes for Employee Stock Purchase Plans (ESPPs) are related to the length of time shares are held and the value of shares at the time of grant, exercise, and sale.
• Equity income is usually treated differently than ordinary income. A realized gain from the sale of stock received from equity compensation is not taxed the same way as a paycheck. Walk through the basics of key tax principles regarding equity, such as how the length of time a person holds their shares will determine whether they may owe ordinary income tax, alternative minimum tax, and/or capital gains tax (both short- or long-term)—or how the “wash” rules prohibit selling a stock for a loss and recognizing that loss for tax purposes if a substantially identical security is purchased 30 days before or after the sale.
• The paperwork matters. Help your participants understand what tax forms they’ll get from their equity program and where and how to access the paperwork they’ll need to file their income tax returns. For example, equity recipients will receive a Form 1099-B from their broker if they sold any shares during the year. A participant’s employer will provide different IRS Forms for those who exercise an ISO during the year (Form 3921) vs. those who exercise NQSOs (Form W-2), have RSUs that vest (Form W-2), or purchase shares through an ESPP (Form 3922).

#3: Point participants to additional support

At the end of the day, equity and taxes are each complex, and doubly so together. It’s completely understandable that your participants may need more personalized guidance, and you might not offer this type of support through the workplace. That is okay. But don’t let that stop you from helping participants understand the importance of their decisions. Point them in the right direction for more support.

Whatever type of equity you offer, a financial advisor can offer your participants more strategic investment advice. Emphasize this point and encourage participants to enlist experienced tax professionals to help them figure out the nuances of their specific tax situation. Emphasizing education, diving into the details, and pointing toward additional resources can all help smooth out the tax season experience for your top talent.

 Kate Winget is Chief Revenue Officer, US Public Equity Solutions, at Morgan Stanley at Work.