A recently passed House bill would permit certain start-up
employees to defer taxes on stock options and restricted stock
units (RSUs). The proposed legislation aims to help emerging
companies attract and retain talent by offering equity compensation
on more attractive terms.
Cash-strapped start-ups often grant an ownership stake to
employees to compensate for below-market wages. This strategy
also aligns incentives by giving employees a share of the
company's growth.
However, current tax law makes such equity compensation less
attractive than it might otherwise be. When employees
exercise their stock options or when RSUs vest, they must pay taxes
on the excess difference between the current fair market value and
the purchase price. Of course, the employee hasn't
actually pocketed any cash. So the income is
"phantom" income, but the tax burden is real.
Public company employees have the option to sell shares on the open
market, but there is typically no
