What is a stock grant?
A stock grant occurs when a company issues shares of its stock in exchange for non-cash consideration, typically the performance of services. By compensating with stocks, the employer aims to motivate employees to stay at the company and keep them invested in its ongoing success.
How do stock grants work?
Stock grants act as a form of compensation for employees. In addition to (or instead of) traditional cash compensation, the employer gives workers corporate stock in their company. Giving stock grants is a way to show that the company is investing in its employees and trying to build a strong future together. Any company can give stock grants to employees, but this practice is prevalent with startups.
Typically, stock grants come with some restrictions. It’s common for stock grants to vest over one or two years. This vesting period means that the employee will only receive those stocks if they stay with the company until that period of time is over. Employees who leave before their stocks vest will forfeit those stocks. Note that employers can only issue stock grants for past services.
Stock grant vs. stock option
It’s easy to confuse stock grants and options, but they differ fundamentally. A stock grant provides the recipient with value—the corporate stock. By contrast, stock options only offer employees the opportunity to purchase something of value. They can acquire the corporate stock at a set price, but the employees receiving stock options still have to pay for those stocks if they want them.
The idea behind both practices is to motivate your employees to work harder for your company. Employees who receive stock grants or options may be willing to put more effort into their work since they stand to gain from company stock price increases. For the employer, providing stock grants or options to employees offers the additional benefit of not requiring a cash outlay upfront.
Creating a stock grant agreement
Any company issuing employee stock grants must have stock grant agreements in place. This agreement outlines the details of the stock grants, such as the number of stocks granted and the vesting timeline. You can customize your company’s standard stock grant agreement with any terms or clauses vital to you. For example, you may include non-compete provisions in your agreement to prevent employees from moving to your competitors.
The employee receiving the stock agreement should read it carefully and decide whether to accept the stock grant. They should sign and return the stock grant agreement if they accept the terms.
How are stock grants taxed?
Employees who receive stock grants may wonder, “Are stock grants taxed as income?” The answer is yes, you must pay income tax on your stock grants—but not necessarily when you receive them. If the employee’s stocks have a vesting period, they don’t owe income tax on the stock grants until those stocks vest. At that time, the employee must report the equivalent cash value of their stocks as income.
Issuing stock grants also has tax ramifications for the employer. Companies that issue stock grants to employees may be able to claim a corporate tax deduction. To claim the deduction, U.S. employers must report the value of the stock grants on IRS Form W-2 or Form 1099.
Offering stock grants to foreign employees
You can also include your foreign employees when compensating your team with stock grants. Generally, U.S. companies can issue stock grants to foreign workers. But first, be sure to check local laws and regulations for any restrictions. Keep in mind that tax laws vary significantly from place to place. What’s advantageous for your tax bill in one location may not be beneficial in another.
Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
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