FAQs About Executive Taxation
Executive Taxation FAQs
Executive compensation can involve much more than a regular salary or bonus. Executives may receive stock options, restricted stock, deferred compensation, retirement benefits, company cars, personal-use benefits, supplemental benefits, and other forms of compensation that create specialized payroll and tax considerations.
These FAQs are designed for payroll professionals, HR professionals, accountants, controllers, compensation professionals, tax professionals, business owners, and others responsible for administering executive compensation.
Common FAQs About Executive Taxation
What is executive compensation?
Executive compensation includes the salary, wages, bonuses, incentives, benefits, equity, deferred compensation, retirement benefits, and other forms of compensation provided to executives.
Is executive compensation subject to payroll taxes?
Generally, taxable executive compensation can be subject to applicable federal, state, and local payroll taxes. However, different forms of compensation can have different tax treatment.
How are executive bonuses taxed?
Bonuses are generally treated as supplemental wages for federal income tax withholding purposes, subject to applicable rules. Employers may use an applicable supplemental wage withholding method rather than treating the bonus exactly like regular wages.
Are executive bonuses subject to Social Security and Medicare taxes?
Generally, bonuses are wages for Social Security and Medicare tax purposes, subject to applicable wage-base and additional Medicare tax rules.
Are bonuses subject to state income tax?
Potentially, as state and local withholding requirements vary by jurisdiction.
Can an employer gross up an executive's bonus?
Yes, an employer may agree to a tax gross-up arrangement. A gross-up increases the payment so that the executive receives a specified net amount after applicable taxes.
What is a tax gross-up?
A tax gross-up is an additional payment designed to offset taxes associated with a particular compensation item or benefit.
What is equity compensation?
Equity compensation provides employees or executives with an ownership interest or potential ownership interest in a company. Common forms include:
- Stock options
- Restricted stock
- Restricted stock units
- Stock appreciation rights
- Employee stock purchase arrangements
- Other equity awards
What are stock options?
Stock options generally provide the recipient with the right to purchase company stock at a specified exercise price, subject to the terms of the award.
Are stock options taxable when granted?
The tax treatment depends on the type of option and applicable rules.
What is a nonqualified stock option?
A nonqualified stock option, or NSO/NQSO, generally does not receive the special tax treatment available to qualifying incentive stock options.
When is a nonqualified stock option generally subject to payroll taxation?
For many nonqualified stock options, the spread between the fair market value of the stock and the exercise price at exercise can create taxable compensation.
What is an incentive stock option?
An incentive stock option, or ISO, is a type of stock option that may receive special federal tax treatment if applicable requirements are satisfied.
What is restricted stock?
Restricted stock is company stock subject to specified restrictions or vesting conditions.
What is a restricted stock unit?
An RSU is a contractual right to receive shares or their value after specified vesting conditions are satisfied.
When are RSUs generally taxable?
For many RSUs, taxable compensation generally arises when the shares vest and are delivered or otherwise become taxable under applicable rules.
Is RSU income subject to payroll taxes?
Generally, taxable RSU compensation can be subject to applicable payroll taxes.
How does payroll handle RSU withholding?
Payroll may need to coordinate with the company's equity administration system to determine:
- Taxable income
- Shares vested
- Fair market value
- Taxes withheld
- Shares withheld
- Reporting amounts
What is deferred compensation?
Deferred compensation is compensation earned or promised in one period but paid at a later time.
What is nonqualified deferred compensation?
Nonqualified deferred compensation, or NQDC, is a deferred compensation arrangement that generally operates outside the qualified retirement plan rules.
What is Section 409A?
Internal Revenue Code Section 409A establishes federal requirements for certain nonqualified deferred compensation arrangements.
Why is Section 409A important to payroll?
Failure to comply with applicable Section 409A requirements can have significant tax consequences for affected employees.
Payroll should coordinate with tax, legal, HR, and compensation professionals when administering these arrangements. When is deferred compensation subject to payroll taxes?
The timing of FICA taxation can differ from the timing of federal income tax taxation for certain deferred compensation arrangements.
What are executive fringe benefits?
Fringe benefits are benefits provided to employees in addition to cash wages. Executive fringe benefits may include:
- Company vehicles
- Personal-use benefits
- Executive life insurance
- Club memberships
- Housing
- Financial planning
- Travel benefits
- Other personal benefits
Are fringe benefits taxable to executives?
Some are taxable and some may qualify for an exclusion. Payroll should determine the appropriate tax treatment for each benefit.
When should taxable fringe benefits be reported?
The timing depends on the benefit and applicable payroll reporting rules. Employers should establish consistent procedures for reporting taxable benefits.
What are common executive perks?
Examples include:
- Personal use of company vehicles
- Club memberships
- Personal financial planning
- Housing
- Travel
- Company-paid personal expenses
- Executive security
Are executive perks taxable?
Potentially. If a perk does not qualify for an applicable tax exclusion, it may need to be included in taxable compensation.
Why is executive payroll more complicated?
As you can see from the information above, executives may receive compensation that is not common in ordinary payroll, including:
- Annual bonuses
- Supplemental wages
- Stock options
- Restricted stock
- Restricted stock units
- Nonqualified deferred compensation
- Executive retirement benefits
- Company vehicles
- Personal-use benefits
- Supplemental life insurance
- Other executive perquisites
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