🌎 International equity

The Power of the 83(b) Election for Companies with Global Talent

Navigating the intricacies of tax and stock ownership can be particularly challenging for small and medium-sized business (SMB) owners and HR managers.

The 83(b) election, in particular, is an IRS provision that carries significant weight, especially for employees within an Employee Stock Ownership Plan (ESOP).In today's globalized marketplace, understanding and leveraging the 83(b) election can be a game-changer, particularly when it comes to attracting and retaining top talent. Moreover, it presents unique opportunities and considerations for international employees. Let's explore what this election means, why it's crucial for SMBs with a global workforce, and how it can impact your company and employees.

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What is an 83(b) Election?

Named after the section of the Internal Revenue Code it falls under, the 83(b) election is a provision that allows employees who receive stock that's subject to vesting rules to pay taxes upfront at the time of grant, rather than when the stock fully vests. This election applies to both restricted stock and stock options.

Typically, when an employee receives stock or options that have a vesting schedule, they are not taxable until the shares fully vest. In other words, the employee only pays taxes on the value of the stock at the time of vesting, regardless of any appreciation in value during the vesting period.

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When is the 83(b) Election Applicable?

Businesses offer equity compensation to employees as a reward for their hard work and to incentivize their continued dedication. However, when this stock is issued under certain conditions that require a vesting period, the 83(b) election can supersede the normal taxing rules.

To be eligible for the 83(b) election, employees must make this election within 30 days of receiving the stock or options. This is a crucial deadline that employees must not miss if they wish to take advantage of this provision.

Moreover, the 83(b) election only applies to equity issued by privately held companies. Publicly traded companies are not eligible for this election as their stock is already subject to market value and can be easily sold on the open market.

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🀷 How Does it Work?

Making an 83(b) election involves completing and filing the 83(b) election form (or IRS form 83(b)) with the IRS within 30 days of receiving the equity. It's a one-time event, meaning you can't revoke it, but it offers the benefit of taxing the equity at its original, often lower, value. If the stock value increases considerarly over time, you could end up paying substantially less in taxes. However, if the stock value decreases or becomes worthless, you can't recover the taxes paid.

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The Importance of the 83(b) Election for International Employees

The 83(b) election has particular significance for international employees expecting to pay taxes in the US. Without proper tax planning and elections, foreign tax complications can arise, alongside potentially higher tax obligations and a less-than-optimal (or challenging) situation for both the company and the employee.

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Benefits and Considerations

For international employees expecting to pay taxes in the US, the 83(b) election can simplify their tax liabilities. While US-based employees can have the taxes on equity compensation deducted directly from their pay, international employees often face more complex tax withholding requirements. The 83(b) election can provide clarity and possibly reduce the overall tax burden.

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The Role of the 83(b) Election in Talent Retention and ESOP Participation

In a competitive job market, equity compensation can be a significant draw for potential employees, particularly those who reside and work outside the US. The 83(b) election is one tool that can facilitate this process for SMBs.

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Case Studies and Examples Highlighting the Impact

For instance, a multinational startup that implements the 83(b) election can effectively reduce the tax burden for employees, making the company more competitive, and it's stock options more attractive.

As another example, an international employee who is expecting to pay taxes in the US and who leverages the 83(b) election could see a substantial decrease in their tax liability as their company's value grows, resulting in a significant financial incentive.

However, these positive outcomes are balanced by potential pitfalls. A misstep in filing the 83(b) election, or failing to do so within the 30-day window, can lead to unintended tax consequences. For example, it may result in increased tax liabilities, penalties, or a loss of certain tax benefits associated with stock ownership. These consequences can erode the perceived benefit of stock ownership and often lead to employee dissatisfaction.

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Implementing 83(b) Elections within Your Company

For SMBs, integrating the 83(b) election into their equity compensation strategy can be a complex but worthwhile endeavor. Ensuring your team is well-informed and supported through the election process is critical.

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Best Practices and Tips for Successful Implementation

Transparency and communication are paramount. Sharing the implications and potential tax savings of the 83(b) election can motivate employees and foster a culture of stock ownership. Working with a tax advisor or counsel to ensure the proper completion and filing of the 83(b) form is also essential.

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Conclusion

The 83(b) election has the potential to significantly impact the relationship between companies and their employees, but it requires a thorough approach and understanding from all involved parties. For SMBs, particularly those with global teams, the investment in time and planning for the 83(b) election can yield substantial dividends in the form of a motivated and appreciative workforce.

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