In 1988, I boarded a jet in D.C. and when it took off, a law school buddy of my father’s got up from 1st class and came back and sat with me for two hours to chat. In that visit, the Chair of the US Senate Finance Committee, Russell Long, told me about some of his ideas related to employee stock option plans.
I have often wondered if working families could receive better benefits in the form of capital gains income.
If you look at the USA tax structure, it is possible for entry-level employees to be paid in a combination of cash and stock. While W-2 payments of cash with various tax and benefit withholdings is the most common form of compensation, some companies offer equity or stock-based compensation as part of their overall compensation package, including to employees at various levels within the organization.
The IRS and websites like Nerd Wallet have the new published rates of Capital Gains Tax for 2023. What is interesting is that individuals earning less than $41,675 and couples earning less than $83,350 own ZERO capital gains taxes.
The specific structure and proportion of cash and stock compensation will vary depending on the company's policies, industry norms, and individual employee agreements. However, the sheer fact that an employee can receive between $41,000 and $83,000 in payments without tax is intriguing.
Typically, higher-level executives and key employees may receive a larger portion of their compensation in the form of stock or equity, while lower-level employees may receive a smaller percentage or no stock-based compensation at all.
Offering stock-based compensation to employees at all levels can align their interests with the company's success, encourage loyalty and retention, and provide potential financial upside if the company performs well and the stock price increases over time.
It's important to note that the availability and terms of stock-based compensation are determined by each company individually. Therefore, the specific details and eligibility criteria for stock compensation should be discussed with the company's human resources department or outlined in the employee's contract or offer letter.
While employees may avoid federal taxes, some states may require taxes on capital gains for all persons. Colorado taxes capital gains as income and both are taxed at the same rates. The state income and capital gains tax is a flat rate of 4.55%. Also, some states have huge taxes such as California as it taxes capital gains as ordinary income. The highest rate reaches 13.3%
As a note, this is the tax nugget that is really interesting. The following states do not tax capital gains: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
I remember riding home on a flight next to Senator Russell Long as he told me about his dreams for effective ESOPs and employee stock ownership plans, and how this type of strategy could create an environment of higher employee ownership or morale. However, with inflation, unaffordable health insurance, and housing costs skyrocketing, the answer to the problem may be a tax free salary in the form of “rolling options” each year.
The employee could decide how much to sell each month or year. However, the company would need to create a type of non-public stock that stable and collateralized by assets which could be redeemed anytime.
Like a MLP Master Limited Partnership where you are paid with a mix of income and capital gains, many employers and employees may appreciate the tax efficiency of this type of payment system.
Some smart payroll or payments company will figure out how to make effective capital-gains stock redemptions to employees who have worked at a company for more than a year. This technique if implemented would be part of the TFROT “Mentz - Tax Free Rolling Options Theory.”
This strategy could boost employee retention, boost loyalty, and raise the standard of living for employees. Some companies may even be able to boost stock prices and save money on wages by cutting down the matching expenses and taxes owed per employee all while the employee takes home more money before and after taxes are applied.
Humbly, I give credit Senator Long’s inspiration in 1988, as he was a giant and friend of the working family.
Commissioner George Mentz JD MBA CILS CWM® is an international lawyer, speaker, educator, tax-economist, and CEO of the GAFM Global Academy of Finance & Management ®. The GAFM is a ESQ accredited graduate body that trains and certifies professionals in 150+ nations under CHEA ACBSP and ISO 21001 standards. Mentz is also an award winning author and graduate law professor of wealth management for a top U.S. law school.
© 2023 Newsmax Finance. All rights reserved.