Occasionally, I am asked if a company can consider employee services as payment for stock. The thought process goes like this:
On a date when ABC Inc. stock is worth $1 per share the company grants a share to each of Employee A and Employee B. The shares are either vested, or, if unvested, a tax code Section 83(b) election is filed. This means that in either case the ordinary income to be recognized, if any, will be recognized at grant rather than when the shares vest.
Employee A pays $1 in cash for the stock. Employee A has no taxable income on the date of grant because there is no delta between the value of the stock and the amount paid.
Employee B has performed services for ABC, Inc. worth $1 in exchange for the stock.
So, the question being asked is, does Employee B recognize income on the date of grant?
Yes. Employee B will recognize $1 of income on the date of grant, because Employee B does not get credit for services as the amount paid.
Why not?
The reason the tax code treats payment with cash differently than payment with services is because the cash has already been taxed, whereas the services have not yet been taxed. If Employee B were instead paid $1.50, on which Employee B paid $0.50 tax, then Employee B could use the remaining $1.00 as actual purchase price for stock.
If paying for stock with services worked, we could also pay for our salary and bonuses with services and not owe any tax. That would be a beautiful thing!
Mike Baker frequently advises with respect to the taxation of equity compensation. He possesses a breadth and depth of experience in tax and employee benefits & compensation law that spans multiple decades. For additional information, please contact mike@mbakertaxlaw.com.