How to Calculate Equity and Withholdings
- 1). Determine if your equity compensation requires withholding. In general, tax withholding is a requirement for all equity compensation, such as when you receive a grant of vested stock or you exercise a stock option. However, if you exercise an stock option and sell before two years go by--what is called an disqualifying disposition--the Internal Revenue Service does not require withholding.
- 2). Calculate the value of your equity compensation. The dollar value of the equity will depend on the number of shares and the trading value of the business' shares. For example, if you are offered 100 shares with a current value of $100 a share, the value would be $10,000.
- 3). Multiply the value of the equity compensation by the IRS' tax rate on stock options. As of 2011, the IRS charges a 15 percent maximum rate on long-term capital gains. For instance, if the value of your equity compensation is $10,000, ask your employer to withhold $1,500 toward your tax liability. Although equity compensation is not a cash payment, you must pay the withholding in cash. This may require you to tap into savings, get a loan or sell some of the stock options. You may incur in an additional tax liability if you sell your stock options before two years.
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