Entrepreneurs grant themselves stock in the companies when they start and may offer their employees and contractors some form of equity incentive to convince them to come on board. If you are considering granting stock to yourself as a founder or joining a company that is offering to grant you stock in addition to or in instead of payment, you should understand the potential tax consequences before accepting.
83(b) Election is a letter that you send to the IRS (Internal Revenue Service) in order to notify the IRS that you want to report income tax the year your stock was granted rather than when it is vested. In other words, you will report income at the current stock price when the stock is granted to you rather than the stock price the year the stock vests.
It is significant that Section 83(b) elections are applicable only for stock which is subject to vesting because grants of fully vested stock will be taxed at the time of the grant.
When founders decide to make an 83(b) election need to ensure that they do not miss the 83(b) filing due time. An 83(b) election must be filed with the IRS in 30 days after the grant or purchase date of the restricted stock. When the last day for filing 83(b) election is calculated, every day counts (including weekends and holidays) and counting starts with the day after the grant date.
Who makes the 83(b) election?
The person who receives restricted stock as compensation makes the 83(b) election.
These are the steps that you need to follow to file an 83(b) election:
There is no official form of IRS for making the 83(b) election.
There are some steps which include some paperwork within 30 days of the grant date to make an 83(b) election:
The model form submits by the IRS does not make any substantive changes to the requirements under current regulations. It indicates the current requirements. You make the 83(b) election by sending to the IRS office where you file your return the appropriate information.
To make some copies of the completed and signed 83(b) election form and one copy of the IRS cover letter.
Send the original completed and signed 83(b) election form and cover letter, the copy of the cover letter, and a self-addressed stamped return envelope to the IRS Center where you would otherwise file your tax return. Even if an address for an IRS Center is already included in the forms below, it is your obligation to verify such address.
Deliver one copy of election form to the company.
Applicable state law may want to attach a copy of the election form to your state personal income tax returns when you file it for the year (assuming you file a state personal income tax return).
Keep one copy of the election form for your records.
Note: If you are married, there have to be a spousal consent signature.
Employer Identification Number, i.e., EIN is also known as the Federal Tax Identification Number. This nine-digit number allows IRS to identify you and your company. If you have an EIN, you do not need a Social Security Number for tax transactions. Employer Identification Number is a kind of Social Security Number for companies.
Do you need an EIN?
• If you have a partnership or a corporation,
• If you have employees,
• If you are filing a tax return,
• If you want to open a bank account for your company,
• If you’re going to get a credit card for your company,
• If you apply for business permits,
If the answer to any of the questions above is yes, you need to register and obtain for an EIN.
If you have a single partner LLC or Sole Proprietorship, you do not need to register for an EIN. You can use your Social Security Number for tax transactions. However, most of the single partner LLC and Sole Proprietorship obtain an Employer Identification Number for separate the company’s and their tax liabilities. The EIN is looking like more professional than the SSN regarding doing business with third-party companies and contractors. Also, EIN has information about your company instead of information about yourself, but SSN has info about yourself. Using an EIN is better than SSN, for avoiding the personal identity theft.
When do you use your EIN?
Probably for every single action of your company, services ask for your EIN to prove your identity. For example, if you use Payoneer, Stripe or any payment method, they will first ask you EIN. It is the same for opening a bank account. You can not do 83(b) election or post- incorporation without EIN.
How can you apply for an EIN?
The application methods we have mentioned above require professional legal support, and it forces the individual applicants. Employer Identification Number application can be made individually, or you can get from the professionals who provide this service. Clemta offers EIN service both in its incorporation packages and separately if you already incorporated your business. You can use Clemta to have EIN without having to deal with the suffocation of documents.
An 83(b) election is an election made by a service provider to recognize the current income on equity compensations received for services which are subject to vesting or similar restrictions etc. For a taxpayer, filing an 83(b) election may result in significant tax savings. Most importantly, it allows founders and other shareholders to be taxed at the current fair market value of shares when they are granted.
There is an attractive option created by the Internal Revenue Code for Startup founders with 83(b) section of the Internal Revenue Code. The 83(b) election provides founders with the option to be taxed for the entire number of stocks that are subject to vesting at that present value, which might be fairly peppercorn.
By making an 83(b) election, you pay the tax when you receive the stock, not when it vests. This would be very advantageous for the growth expected company which has a potential of increased value and income. An important thing to mention is that an 83(b) election has to be filed with the IRS within 30 days of the purchase of the stock.
The clock is ticking!
Not filing an 83(b) election within 30 days of receiving shares subject to vesting may end up being a pretty unpleasant mistake. If the value of the company’s stock has gone up, the taxes can be even more than the service provider can pay.
These 30 days can go by very quickly, so, it would be a good choice to file the 83(b) election just after signing the restricted stock purchase agreement. Considering the procedures required by the U.S. Government, having a professional consultancy and service can boost your business in a safe and beneficial way. In Clemta, we provide you with the required support to successfully construct, develop and grow your company.
We are here to help. Use Clemta!