What Does an IPO Mean for Employee Taxes?

401K, IRA, Stocks Young Startupers At Briefing

With Snap Inc. going public a little over a year ago and Spotify doing a direct listing on the New York Stock Exchange yesterday without an initial public offering (IPO), we thought it would be a good time to talk about what IPOs, Restricted Stock Units, and Employee Stock Purchase Plans mean to employees.

An IPO is a big moment for many stakeholders in a company, including its own employees. When a company goes public, many employees get a major income boost because they may be given Restricted Stock Units as part of the company’s incentive plan. So what does this mean for employees and their taxes?

Restricted Stock Units (RSU) from your employer are a promise to grant shares of stock, which are granted on a vesting schedule or meeting of certain milestones by you or your company. When vesting occurs, the value of the stock is considered ordinary income and the employer is required to withhold taxes as soon as the RSU is vested, whether you sell your shares or not. If you later sell the shares, the change in value is a capital gain or capital loss.

RSUs are not the only way you can own stock in your company. Employee Stock Purchase Plans (ESPP) are shares that you buy at a discount so you don’t have to pay taxes until you sell the stock.  When you sell the stock, the discount you received when you bought the stock is generally considered additional compensation to you and will be taxed as regular income. If you sell your stock in less than one year, your gains will be considered compensation and taxed as ordinary income. However, if you sell your shares after one year, your profit will be taxed at the lower capital gains rate.

If you are lucky enough to garner some unexpected income through RSUs, you may be subject to higher taxes than under an ESPP. Either way, stock options give you a chance to make more than your salary, and they also give you a sense of ownership in the company.

Have you ever received employee stock options? What type were they?

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