There’s no shortage of ways to compensate employees and keep them engaged. If you want to “kill two birds with one stone,” consider offering employees equity in your company.
In basic terms, having equity in a company means having a stake in the business you’re helping to grow. Even a small amount of equity can turn into a big payday if the company is successful over the long run.
What’s the difference between equity and stock?
It’s easy to believe that equity and stock are the same thing, as there are many similarities between the two. However, there are some key differences that employers and employees must be aware of.
In the most basic terms, equity is the ownership of assets after any debt is paid off, while stock refers to traded equity.
Why do companies offer equity to employees?
It’s common for startup companies to offer equity to employees. Some of the many reasons for this include:
- Recruiting top talent: The most talented professionals are often interested in more than a traditional arrangement that pays nothing more than a salary.
- Improving employee engagement: When an employee owns a part of your business—no matter how big or small—they’re more likely to remain engaged.
- Boosting retention: Offering equity can help reduce turnover. For example, you can stipulate that an employee only receives the predetermined amount of equity after they’ve been with the company for a certain number of years.
- Paying lower salaries: By offering equity to employees, you may gain the option to pay less in salaries. This helps free up funds for advertising, marketing, and growing your offerings.
With these four points in mind, you should at least consider offering equity to some or all of the employees you hire. It’s a win-win situation.
What taxes do employees have to pay on equity?
Being paid in equity is not the same as being paid a salary only. Employees must understand when equity is granted and how much they’re receiving, as it will impact them from a tax perspective.
The first thing employees must do is determine what type of equity they’re receiving. This will help them better understand the tax implications. Here are some examples:
- Restricted stock units: These are generally for new employees and consultants and are awarded at any stage of company growth. If the units are settled in stock, the employee recognizes the income based on the market value of the shares on the date of transfer. Capital gain or loss comes into play upon selling the stock.
- Restricted stock awards: These are generally for founders or early-stage employees who come on board when the company’s value is low. Restricted stock awards are taxed to the employee at the time of vesting. Gains or losses are calculated by taking the difference between the value of the stock at vesting and the price the employee paid. This difference is taxed as ordinary compensation at standard tax rates.
What about employees in other countries?
If you have international employees, you know how important it is to properly manage their payroll and benefits. Additionally, if you provide any of these employees with equity, stress the importance to them of understanding the tax implications.
As an employer, you must become familiar with details such as:
- The cost of equity to the company
- Employer-side tax obligations
- Compliance requirements
Tip: Use our equity assessment tool to better manage equity offerings to employees in more than 60 countries. This reduces uncertainty and gives you confidence when providing equity to employees around the globe.
Get started with Oyster
Manually managing equity across a global team is easier said than done. With so many tax obligations and compliance requirements, it’s easy to make a mistake. Fortunately, with the help of Oyster, this isn’t so much of a concern. You gain access to everything you need for more efficient management.
We let growing companies give valued international team members the equity they deserve, without the usual stress and expense. If you’re ready to get started, register for an account today. You’ll soon realize that providing employees with equity—and managing all related details—can be simple and straightforward.
Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.