How Should Tax Reform Treat Employee Stock and Options?

The Urban Institute, October 2017

12 Pages Posted: 11 Dec 2017

Date Written: October 4, 2017

Abstract

This brief documents how the US tax system treats the most common forms of equity compensation, including stock, restricted stock units, and stock options. In most cases, these forms of equity compensation are taxed just like cash wages, salaries, and bonuses. Employees pay ordinary income taxes on the value they get from stock and most options. Employers deduct that value from their taxable income. And both employees and employers pay payroll taxes. The tax system thus creates a level playing field between equity and cash compensation. The large deductions businesses sometimes get for equity compensation—most famously when Facebook went public—are not a concern since they are accompanied by large tax payments by employees. Policymakers should maintain this equal treatment in any tax reform.

Keywords: US tax system, stock options, payroll tax, equity, tax reform, income tax, stock units, equity compensation, business tax deductions

JEL Classification: H2, J2, J6

Suggested Citation

Marron, Donald B., How Should Tax Reform Treat Employee Stock and Options? (October 4, 2017). The Urban Institute, October 2017, Available at SSRN: https://ssrn.com/abstract=3058954 or http://dx.doi.org/10.2139/ssrn.3058954

Donald B. Marron (Contact Author)

The Urban Institute ( email )

2100 M Street, NW
Washington, DC 20037
United States

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