This bill would allow rank-and-file employees at startup companies to defer paying income taxes on money earned by exercising their stock options for up to seven years. Currently, such employees are required to immediately pay income taxes when exercising stock options, and if they don’t have enough cash to cover their tax bill they may have to exercise more of their options or not exercise them at all.
Eligible employees would be able to defer the income from their stock until either:
The stock is sold, exchanged, or transferred;
The employee becomes an excluded employee;
Company stock becomes readily tradable on an established securities market;
Seven years has passed after the employee’s stock becomes transferable or isn’t subject to a risk of forfeiture (whichever occurs sooner);
The employee chooses to include the money in their income.
Employees would be excluded from being able to defer their income taxes if they:
Own 1% or more of the company, are the chief executive officer, or chief financial officer;
Are a family member of such an individual;
Are one of the four highest compensated officers of the corporation.
Companies would be eligible if their stock isn’t readily tradable during the year or preceding year that the employee stock is exercised, or if it has a written plan under which at least 80 percent of all employees have the same rights and privileges to receive stock for the year. An eligible company would be required to notify employees of the option of deferring income, and meet specified withholding and reporting requirements.