I'd say the bulk of stock-based compensation these days is RSUs, and RSUs are treated as deferred income with income taxes due at settlement (either a liquidity event or on vesting). It's taxed exactly the same as income -- including Social Security and Medicare taxes.
The next most popular choice are NSOs, which are taxed as ordinary income when exercised on the difference between the strike price and the fair market value -- and you do in fact pay Social Security and Medicare taxes. Once you hold the stock, it's no longer compensation, it's an asset you've bought and paid for.
Third most popular are ISOs which do have some preferential treatment, although it's rare to be issued ISOs at anything other than a very early stage company, and at that point, you're likely to exercise early, and then once again, you've bought and paid for an asset and the it's no longer your compensation.
Founder shares are also assets and not compensation, and taxed as such, assuming you file your 83(b) election in a timely fashion.
I think it's fair to say that the rare issuance of ISOs notwithstanding, stock compensation is taxed as ordinary income and is exposed to social security and medicare taxes.
Finally -- and most importantly, IMO -- social security tax stops accruing after you've earned $142,800USD. Chances are if you're earning stock compensation in the Bay Area, that's covered by your base pay plus bonuses, if applicable.
Comments
I'd say the bulk of stock-based compensation these days is RSUs, and RSUs are treated as deferred income with income taxes due at settlement (either a liquidity event or on vesting). It's taxed exactly the same as income -- including Social Security and Medicare taxes.
The next most popular choice are NSOs, which are taxed as ordinary income when exercised on the difference between the strike price and the fair market value -- and you do in fact pay Social Security and Medicare taxes. Once you hold the stock, it's no longer compensation, it's an asset you've bought and paid for.
Third most popular are ISOs which do have some preferential treatment, although it's rare to be issued ISOs at anything other than a very early stage company, and at that point, you're likely to exercise early, and then once again, you've bought and paid for an asset and the it's no longer your compensation.
Founder shares are also assets and not compensation, and taxed as such, assuming you file your 83(b) election in a timely fashion.
I think it's fair to say that the rare issuance of ISOs notwithstanding, stock compensation is taxed as ordinary income and is exposed to social security and medicare taxes.
Finally -- and most importantly, IMO -- social security tax stops accruing after you've earned $142,800USD. Chances are if you're earning stock compensation in the Bay Area, that's covered by your base pay plus bonuses, if applicable.