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In the California tech scene, it's fairly common to have anywhere around 10-60% of a software engineer's income come from shares of stock in one's company. How much of the salary is in stock is also generally negotiable, leaving many software engineers wondering how they should ask to have their income split between the two.

Specifically with regards to taxes, both California state taxes and United States federal taxes, what are the implications of having more or less of one's income in publicly traded shares?

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what are the implications of having more or less of one's income in publicly traded shares?

Stock-based compensation is taxed in several parts.

First it's taxed as ordinary income when it's vested, which can be immediately or in groups over several years. Typically, this tax is automatically deducted from the shares that you get, meaning if you are awarded, say 1,000 shares and are subject to 40% total tax withholdings, you'll actually get 600 shares that you can sell. The actual amount that is withheld is based on the total dollar value of the vested shares, but the math is roughly the same.

After that, any gain that you realize when you sell the shares (i.e. if you sell them for a higher price that they were when you received them) will be taxable as capital gains. It's only the gain that's taxable, not the full price you get when you sell. If you sell them within a year, then any gains or losses are considered short-term and are treated as ordinary income. If you wait a year or more, then any gains and losses are long-term and are subject to a lower (or no) tax rate.

You also won't have any tax withheld from your sale (since it's an open market transaction) so if the gain a substantial amount, you may want to make an estimated tax payment, or increase your payroll deductions, to make sure you don't have a surprise tax bill when you file the next April.

If you also get dividends from the stock that you hold (not unvested stock) that is taxed as well.

All that said, if you are trying to consider how much to receive in equity versus salary, then tax should not be a major issue. Income is income. Look at how much guaranteed cash flow you need and how much you can afford to set aside in risky stocks. I always think of it this way - if I instead had that money in cash, would I go buy my company's stock? I have yet to have a situation where I wanted to keep a significant portion of my compensation in my company's stock - but I have known others that kept hundreds of thousands of dollars in company stock on the "chance" that is "goes big". I've always had better uses for my compensation than that.

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  • Let me see if I understand you correctly. Salary as stock is taxed twice, once upon vesting as income at the same rate as if one had been paid in cash instead, and again upon sale of the stock. The first taxation is at the value of the shares upon vesting, so ideally you'd want the company's stock value to rise as little as possible until the shares vest, and then rise as much as possible afterward. The second taxation is largely based on timeline, with sale past a year taxed at a far lower rate than sale earlier. Is that right, and am I missing anything?
    – TheEnvironmentalist
    Commented Apr 4, 2020 at 16:31
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    @TheEnvironmentalist One might niggle that saying that the salary is "taxed twice" is a little misleading. No actual dollar of value you receive is taxed twice... Different portions of that value are just taxed at different times.
    – glibdud
    Commented Apr 4, 2020 at 17:25
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    @TheEnvironmentalist No- the initial grant is taxed once, and any gains are taxed as such. So if you get $10,000 in stock, you are taxed on that $10,000. If you then sell it for $12,000, you are then taxed on the gain of $2,000. Losses count as well by reducing your taxable income.
    – D Stanley
    Commented Apr 6, 2020 at 12:25
  • @DStanley So if you want to get taxed today, take cash. If you want to get taxed on vest, take stock?
    – TheEnvironmentalist
    Commented Apr 6, 2020 at 18:31
  • Yes, but tax shouldn't be a huge consideration. Income is income. A more appropriate choice would be: do I want guaranteed cash now or stock that might go up (or down) in value.
    – D Stanley
    Commented Apr 7, 2020 at 0:08

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