Business executives frequently suffer the costs of the American tax code. Most or all of their income is W-2, subject to FICA taxes and higher conventional tax rates. Home office expenditures and other unreimbursed expenditures, such as mileage and other travel costs, are not deductible for W-2 workers. A big mortgage and charitable giving are the two primary ways to get some tax relief when it comes to itemized deductions because of the $10,000 ceiling on state and local taxes, and even the deduction for mortgage interest has a limitation. Therefore, if you need tax planning, contact a CPA in Nashville, TN.
Strategies for tax planning in executive compensation
The manner in which taxes must be withheld presents a problem for executive salary packages. Many front-line through middle-management employees who get annual bonuses representing a tiny portion of their compensation will have the bonus added to their regular payroll for one extra week and have a higher tax rate deducted than usual. However, large bonuses, commissions, stock compensation, and other types of remuneration are frequently given outside the regular payroll cycle.
Commonly Used Executive Compensation Structures
Before discussing planning tactics, let’s cover some typical executive compensation.
Money Bonus
As the name implies, these are monetary bonuses.
Tax Impact: Cash bonuses may be subject to the legal withholding rate and are taxed similarly to ordinary cash/wage income.
Restricted Stock Awards
Stock granted to an employee that vests (becomes entirely owned by the employee) later, often 1 to 5 years following issuance and/or with a liquidity event.
Tax effect: Stock is taxed upon vesting; there is no tax impact at issuance. As W-2 income, the market value of the shares at the time of vesting is taxable. The shares are automatically sold in part at vest to pay tax withholding. The holding period begins on the vesting date, and the value of the shares received becomes the stock’s tax basis.
Performance-based restricted stock awards
Some businesses provide restricted shares in a variant where the number of shares transferred at vest depends on specified performance requirements.
Tax impact: Similar to restricted stock awards.
Nonqualified stock options
The option to purchase stock is provided to the employee at a reduced cost, usually the market value, on the day of issue.
Impact on Taxes: The spread, often known as the bargain element, distinguishes between the exercise and market prices. The spread is subject to FICA taxes and is taxed like regular wage income.