This presentation discusses financial and tax considerations related to equity compensation. It covers various types of equity awards like restricted stock, stock options, stock appreciation rights, and employee stock purchase plans. It explains when tax is due for these different award types and how income is taxed. The presentation also discusses tax withholding rates, tax reporting requirements for companies, and responsibilities of participants. Special situations like retirement, death, and diversification are addressed as well.

1. Financial and Tax Considerations
for Equity Compensation
Presented by:
Andrew Schwartz, CPA, CEP
Vice President
Computershare

2. Disclaimer
The following presentation and the views expressed by the presenter are not
intended to provide legal, tax, accounting or other professional advice. The
information contained in this presentation is general in nature and based on
authorities that are subject to change. Applicability to specific situations
should be determined through consultation with your legal and/or tax advisor.
DISCLAIMER
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3. Agenda
› Types of Equity Compensation
› Taxation differences among award types
› Special situations
› Beginning-to-end tax analysis
› Q&A

4. Award Types
› Restricted stock
› Right to receive stock in the future
› Will always have some value
› Stock options – Non-qualified and qualified (ISOs)
› Stock appreciation rights
› Rights to benefit from an increase in the stock price
› Employee stock purchase plans (ESPPs)
› Right to purchase stock at a discount
› Can be qualified (§423) or non-qualified

5. Option Exercise Methods
› Cash – Participant sends in money to exercise options
covering the cost of the option and taxes due
› Cashless for Cash – Option is exercised and all shares
are sold to cover the option costs, taxes and remaining
proceeds are remitted to participant
› Cashless Hold – Option is exercised and shares are sold
to cover the option costs and taxes due and participant
retains remaining shares.
› Stock Swap – Swap old shares to cover option costs.
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6. Taxation of Stock Compensation
› When is tax due?
› Restricted stock arrangements
› Restricted stock (time and performance-vested)
› No Section 83(b) election: Subject to tax at vest
› Section 83(b) election: Subject to tax at grant
› Restricted units (time and performance-vested)
› Subject to tax at payout
› FICA due when forfeiture restrictions lapse
› Why is tax due at that time?
› Vesting/delivery = receipt of stock with value
› The value received is a compensation benefit
› This benefit results in taxable income

7. Taxation of Stock Compensation
› When is tax due?
› Non-qualified arrangements
› Non-qualified stock options (NQSO) and stock appreciation rights
(SARs)
› Tax due at exercise date – regardless of exercise method
› Why is tax due at that time?
› Exercise = decision to purchase stock
› Stock is acquired at a discount
› The discount is a compensation benefit
› This benefit results in taxable income

8. Taxation of Stock Compensation
› When is tax due?
› Tax qualified arrangements
› Incentive stock options (ISO)
› Subject to tax at sale of stock
› W-2 reporting for disqualifying sales
› Exception: Cash exercise of ISOs & shares held through year-
end
› Spread subject to AMT at exercise

9. Taxation of Stock Compensation
› When is tax due?
› Tax qualified arrangements
› Employee stock purchase plans (ESPPs)
› IRC §423 qualified plans
› Subject to tax at sale
› W-2 reporting
› Both ISOs and ESPPs
› No payroll withholding
› (But estimated tax may be due)
› No FICA withholding (ever)

10. Taxation of Stock Compensation
› How much income is taxed?
› Non-qualified arrangements
› Spread (FMV less amount paid for the stock, if any) at the time of
› Exercise: Options, SARs
› Vesting: Restricted stock
› Stock Delivery: RSUs
› Payroll withholding always applies
› Qualified arrangements
› Depends on whether the sale meets the statutory holding periods
› No payroll withholding applies
› ISO rules differ from ESPP rules

11. Taxation of Stock Compensation
› What is the company’s responsibility?
› Non-qualified arrangements
› Employees/Former Employees: Report compensation income and
withhold taxes (W-2)
› Non-Employees: Report compensation income (1099-MISC)
› Tax deduction
› Qualified arrangements (ISOs and ESPPs)
› Report compensation income (W-2)
› Report transactions to IRS (includes 3921/3922)
› Tax deduction for sales that don’t meet the required holding period
› Exempt from tax withholding

12. Tax Reporting
› What is the company’s responsibility?
› Section 6039
› ISO exercises reported on Form 3921
› ESPP transactions reported on Form 3922
› Upon purchase, if shares are immediately deposited into
employee’s account at captive/designated broker
› Upon first transfer of legal title, if shares are certificated or held
in book entry, or held at non-company broker
› This form is for informational purposes only

13. Tax Withholding
› At what rates are payroll taxes withheld?
› Stock compensation is considered a supplemental payment
› Federal income tax is withheld at W-4 rate or flat rate (currently 25%)
› 39.6% for individuals that have received more than $1 million in
supplemental payments
› FICA
› Social Security rate is 6.2% for 2014 on wages up to $118,500
› Medicare withholding rate is 1.45% and increases to 2.35% for
wages in excess $200,000
› Company must make matching FICA payments
› Medicare increase applies only to the employee portion
› FUTA
› Company must make any required FUTA payments, up to annual
maximum
› State and local tax withholding may also apply

14. Tax Withholding
› What is the broker’s responsibility?
› Facility to sell shares and monetize awards
› Control regulatory requirements (Sec. 16, 144)
› Backup withholding if not tax certified
› 1099-B proceeds and cost basis reporting
› Pay/reinvest dividends
› NRA withholding
› 1099-DIV/1042-S

15. Tax Withholding
› What is the participant’s responsibility?
› Monitor W-4 exemptions and withholding
› Possible estimated tax payments (qualified awards)
› Proper tax reporting
› Calculating correct cost basis
› Form 8949/Schedule D (capital gain/loss reporting)

16. Dividends
› Dividends paid on unvested restricted stock and units
› Generally subject to tax when paid to employees
› Section 83(b) election was not filed for the award
› Dividend is treated as compensation income
› Subject to FIT/FICA/FUTA withholding
› Reported on Form W-2
› Section 83(b) election was filed for the award
› Dividend is treated as dividend income
› Reported on Form 1099-DIV
› Dividends paid on shares owned by employees, including shares
acquired in ESPP
› Dividend is treated as dividend income
› Reported on Form 1099-DIV

17. Retirement
Best practices
› Understand plan terms
› FICA taxes upon retirement-eligibility event
› Keep track of expiration dates on options once terminated
›Even those currently out-of-the-money
› Provide HR with address changes after retirement
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18. Death
›Best practices
›Set up beneficiaries in advance
›Inform Plan administrator ASAP
›May change vesting terms
›ESPPs & ISOs – special tax rules
›Planning Tip: NQ options – waiting until after calendar year of death
saves Social Security and Medicare tax
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19. Diversification
Diversification/Optimization
• Avoid wealth concentration
• Cashless exercises vs. buy-and-hold
• Risk of stock decline and job loss
• Options/SARs – Tax event deferral, but eventually expire
• ESPPs – Tax event deferral, but may not be optimal
• RSAs – No deferral – taxed at vesting
• RSUs – Deferral possible if plan allows
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20. Diversification
Diversification/Optimization
• 10b5-1 sales plans
• Allow for monetization in controlled fashion over time
• Allows for sales during blackout periods
• Ultimate questions:
• Do you need the money?
• Do you think the stock price will increase or not?
• Are you planning to leave the company?
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21. Why Tax Issues are Important
Assume an individual in the highest tax bracket starts with the $800,000 in option
value and lives in a state like CA. He exercises the options and pays off the
payroll taxes by selling shares and keeping the balance. The $800,000 will be
taxed at 54.94% ($439,547). Leaving $360,543.
Unfortunately, this individual dies the next day. His assets could get taxed at 40%
on his assets at death ($144,181). This leaves $216,362 for his heirs. Which they
spend and are taxed again at the sales tax rate of 7.5% so $16,227 more is
deducted. In total this one transaction resulted in taxes of 75%.
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22. Taxation – Example
› For all employee awards:
› Total Cost Basis = Purchase Price + Compensatory Income
› For covered employee awards:
› Covered – paid cash to receive award
› As of 2014, agents required to report only the purchase price
› Will create shareholder confusion, likely overpayment of taxes
› Share transfers from administration system will sever links to data required
for cost basis calculations.
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23. TAX UPDATE – Cost Basis
› No cost basis will be reported on noncovered securities:
› Vesting restricted stock
› Vesting restricted stock units
› Exercises of stock settled appreciation rights
› Stock swap exercises of stock options
› Net-settled exercises of stock options
› Part of the cost basis will be reported for:
› ESPP purchases = Purchase price only
› Cashless stock option exercises = exercise price only
› Will require participant to know and add compensatory portion to cost
basis on Form 8949
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24. Required Basis Reporting for Stock Plan Shares
Type Actual Cost Basis Required to
Report
NQs MV at Exercise Exercise Price
ISOs QD: Exercise Price
DD: Gain: min (MV at Exercise, Sales Price)
Loss: Exercise Price (if exercise price >
sales price)
Exercise Price
SSARs MV at Exercise Non-covered
RSA MV at Vest1 Non-covered
RSU MV at Release Non-covered
423 ESPP QD: Price Paid + Ordinary Income Purchase Price
NQ ESPP MV at Purchase Purchase Price
1if 83(b) filed, cost basis is market value at grant.
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25. NQ Stock Option Sale Example
Exercise Date: February 15, 2014
Quantity: 100 shares ABC Co.
FMV on exercise date $37/share
Purchase Price: $30/share (strike price)
Sale Date/Price: December 15, 2014
Sale Price $40/share
Fees & commissions: $50
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26. NQ Stock Option Sale Example
14 Tax Reporting
› W-2
- $700 Federal Earnings 100*($37 - $30)
- All applicable payroll withholding
› 1099-B
- $3,950 net sale proceeds
- $3,000 reported cost basis ($3,700 actual cost basis)
- $250 capital gain ($3,950 - $3,700)
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27. 1099-B
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A
100 shares ABC Company
02/15/2014 12/15/2014
3,950 3,000
X
X
X

28. Form 8949
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29. Form 1040, Schedule D
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30. › Equity Compensation Resources
› Certified Equity Professional program (cepi.scu.edu)
› Reference books
› The Stock Options Book (NCEO)
› Selected Issues in Equity Compensation (NCEO)
› Equity Alternatives (NCEO)
› Consider Your Options (fairmark.com)
› NASPP Resources
› NASPP University online programs
› NASPP website
Resources

31. Q&A
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32. Andrew Schwartz, CPA, CEP
Vice President
Computershare
(201) 680-3340
andrew.schwartz@computershare.com
Contact Information

33. Appendix: Restricted vs Stock Options
Restricted Stock / RSUs Stock Options
Value depends on the stock price at
vesting even if the price fell after grant
Value depends on any stock price
increase over the exercise price set at
grant
No payment needed to receive the
shares
You pay the exercise price to buy the
shares
With restricted stock awards (not units
– RSUs), you have dividends and
shareholder voting rights during the
vesting period
You get dividends and shareholder
voting rights only after you acquire the
shares.
You own the shares upon vesting You own the shares upon exercise
The income is taxable at vesting, unless
you filed a §83(b) election to be taxed
on the value at grant (not available for
RSUs)
Option income is taxable at exercise for
NQs and at share sale for ISOs.

34. Plan Types: Qualified 423 Plan Taxes
Gain example
Market Value Qualifying Disqualifying
First Day $10.00 $10.00
Last Day $20.00 $20.00
Purchase Price $8.50 $8.50
Sell Price $30.00 $30.00
Ordinary Income $1.50 ($8.50-$10.00) $11.50 ($20.00-$8.50)
Capital Gain $20.00 ($30.00-$10.00) $10.00 ($20.00-$30.00)
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35. Plan Types: Qualified 423 Plan Taxes
Loss example
Market Value Qualifying Disqualifying
First Day $10.00 $10.00
Last Day $20.00 $20.00
Purchase Price $8.50 $8.50
Sell Price $5.00 $5.00
Ordinary Income $0 $11.50 ($20.00-$8.50)
Capital Loss $3.50 ($5.00-$8.50) $15.00 ($20.00-$5.00)
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