How are Stock Appreciation Rights (SARs) Taxed?

by | Dec 28, 2021 | Tax Planning

How are Stock Appreciation Rights (SARs) Taxed?

by | Dec 28, 2021 | Tax Planning

how are stock appreciation rights taxed

We’ve all heard of the great resignation, and while it’s a bummer for companies…

As employee’s, it’s definitely working in our favor.

Great talent is hard to come across (and keep), and the harder it gets (and the longer this great resignation lasts), the more it forces employers to get creative with their benefits and compensation offers.

In the past, simply having RSUs or an ESPP might have made you all starry-eyed for an employer, but in many circles, those are becoming par for the course. So… what are more innovative companies doing aside from jacking salary rates higher and higher?


(No, we don’t mean the virus from the early 2000s, we mean “stock appreciation rights.”)


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 give you the right to cash in on the *increase* in the value of your company’s shares from the grant date… 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 Stock Appreciation Rights 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 stocks. The gain is subject to ordinary income taxes, just like RSU.


Stock Appreciation Rights, Taxes, and Supplemental Wages

There’s good news and bad news with SARs taxation:

The good news is, 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 rights to voting or dividends.

As usual, though, solid tax planning with someone who knows the ins and outs of taxation, stock options, and SARs 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.

If you do sell, keep in mind that because you’re selling stocks, the profit on them will be subject to short-term capital gains tax, which is at the ordinary income rate depending on your tax bracket.

But, if you play your cards right, 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 Benefits & Their Taxes

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… which is why having a smart financial advising team on your side is so crucial.

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.

Chelsea’s background includes stock option compensation ranging from mergers & acquisitions, Restricted Stock Options, Incentive Stock Options, Employee Stock Purchase Plans and Non-Qualified Stock Options. In addition, she is familiar with IPOs for many companies and can help clients to plan for these large tax events.  Her advanced knowledge of these topics help clients with their tax preparation and planning. Working hand and hand with the financial advisors to mitigate tax risks and burdens, makes her unique to our firm.


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