Once upon a time, receiving RSUs or participating in an ESPP might’ve felt like hitting the jackpot. But in today’s tech world, those are standard.
ISo… what are more innovative companies doing?
SARs. Stock appreciation rights.
If SARs are part of your job offer or compensation package, it’s essential to understand what they are… and how stock appreciation rights are taxed. This guide breaks it down.
Stock Appreciation Rights: What Are They?
So… what do you do if you see SARs in your next job offer?
And what even are they?!?
First, let’s talk about what they are:
Stock appreciation rights (SARs) give you the right to benefit from the increase in your company’s share price between the grant date and the date you choose to exercise… with no exercise cost.
And while I know that sounds awfully similar to RSUs at a first glance… hone in on the wording: you get rights to the increase, not the decrease.
How are SARs Taxed? (How SARs Differ From RSUs)
With RSUs, as soon as they vest, they’re yours: for better or for worse.
When RSUs vest, you receive (and have to pay taxes on) the underlying value of those shares as soon as they vest. It doesn’t matter if there’s a massive decrease in the value of your shares before you’re able to sell them; you’re still responsible for paying taxes on that initial vesting value.
You also don’t get to choose when the vesting happens… that schedule is pre-set for you.
But what about SARs?
And how are stock appreciation rights taxed?
With SARs, you get to choose when you cash out, and you only owe taxes when you do so.
So, if your stock grant price is $10 per share and you decide to exercise your stock appreciation rights at $25 per share, that means you get $15 per share that you can either take in cash or use to gain more company stock.
How stock appreciation rights are taxed is on the gain at exercise. The gain is subject to ordinary income taxes, just like RSU.
Stock Appreciation Rights Taxation and Supplemental Wages
There’s good news and bad news with SARs taxation:
The good news about how stock appreciation rights are taxed, they’re considered supplemental wages, so there will be some withholding done for you.
The bad news is, they’re considered supplemental wages, so for many people, there won’t be enough withholding happening, and you’ll still owe a significant tax bill on your exercise.
Typically, if your income is less than $1 million, your company will withhold 22% in taxes on your supplemental income, paired with whatever the fixed rate for your state is.
The only downfall (if you consider it one) is that “owning” this type of stock in your company doesn’t give you shareholder rights. You don’t receive voting rights or dividends unless the company provides shares instead of cash.
As usual, though, solid tax planning with someone who knows how stock appreciation rights are taxed can get you ahead of the game and make sure you have the financial cushion you need to pay your tax bill when the time comes. (And to make sure you make an estimated payment to avoid a penalty if you need to do so.
Book a call here if that sounds like something you need.)
Can You Sell SARs? What if You Get Company Stocks Instead of Cash?
Sometimes, companies will give you stocks in the company instead of cash when you exercise your SARs. So…. what do you do then? How do those SARs get taxed?
Just like with RSUs, you can sell some of your shares to cover the taxes you’ll have to pay from acquiring those shares.
To cover this, you may need to sell some shares immediately, triggering short-term capital gains tax… which is at the ordinary income rate depending on your tax bracket.
But there’s a silver lining: getting stocks from your company instead of cash could actually work in your favor in terms of long-term wealth building. If you can hold onto the shares for a year or more, they’ll be subject to the long-term capital gains tax rate, which is noticeably less than what you’re charged when your gains are counted as ordinary income. (Especially if you’re in a higher income tax bracket.)
Planning for Stock Appreciation Rights Taxation
Of course, there’s no one-size-fits-all way to exercise SARs and sell the shares you may earn as a result of that exercise.
Your best move? Work with a tax-savvy financial advisor who understands stock appreciation rights taxation and can build a strategy aligned with your income, goals, and risk appetite.
If you’re ready to take the next step in building your wealth in a smart, strategic way, book a call with us today. We’ll be able to help you plan when to exercise, what to hold and what to sell, plan a smart tax strategy, and use the different types of stock options you have to your advantage.
