Stock Bonuses Ought Not Be Taxable

You would think that stock bonuses to employees would be encouraged as good for societal and worker welfare.

However, this is sadly not the case.

The Tax Problem with Stock Bonuses to Employees

Here is the problem with employers paying stock bonuses to employees:

  • Stock bonuses are taxable just like cash compensation, despite the fact that the stock may be stock in a private company and not salable.
  • Both income and employment taxes apply to employee stock bonuses.
  • To receive a stock bonus, unless the employer is going to pay the employee’s taxes (an unusual event) employees actually have to write checks to their employers so that their employers can satisfy the employee’s share of and employment tax withholding.
  • The amount of income and employment taxes applicable to stock bonuses can be so significant that most employees would rather forego the award rather than pay the tax.
  • This adverse tax treatment of employee stock bonuses results in employers resorting to stock options rather than stock bonuses.
  • Stock options are less favorable than stock bonuses for a number of reasons, including, among other things: (i) stock options have to exercised in order for the stock to be issued to the employee; (ii) taxes may be due on exercise; (iii) the taxes due on exercise may be so significant as to dissuade the employee from exercising in full; and (iv) stock options ultimately expire.

Public Policy Recommendations

Here is what Congress should do:

  • Repeal the taxation of transfers of private company stock to company workers.
  • This will allow companies to more readily share equity with workers, which will increase worker and ultimately societal welfare.
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