83(b) Form and Tax Rules For Early Exercise Stock Options

83(b) Election 83(b) Form and Tax Rules For Early Exercise Stock Options

83(b) Form and Tax Rules For Early Exercise Stock Options

A growing number of companies are offering employees equity compensation in the form of stock options. Venture-backed start-ups, for instance, often use stock options as part of the compensation package to attract and retain top talent. Keep reading to learn how to reduce the tax burden on your stocks with 83(b) early exercise

A key characteristic of equity compensation plans is that they vest gradually, meaning that you are not becoming part of the company the very moment you sign your contract. Stock options only give you the right to buy a specified number of shares after a certain amount of time. Your employer may allow you to exercise your stock before it has vested.

The primary benefits of early exercise are tax-related. Remember that the grant itself is not a taxable event; taxation begins at the time of exercise. When you exercise unvested stock options, you could save a significant amount on future taxes if the company you are working at is successful. The idea is that stocks will rise in value over time.

If you exercise your stock options before the fair market value of the company's common stock increases, then you should owe little or no taxes upon exercise. To exercise your stock options early, you'll need to file an 83(b) election form.

What Is an 83(b) Election Form?

The 83(b) election form is a document you mail to the Internal Revenue Service (IRS) to make your early exercise official. Filing the 83(b) election form alerts the IRS to tax you for ownership of company stocks at the time of granting instead of waiting until the stock vests. It comes from a provision under section 83(b) of the U.S. tax code, hence the name.

There are two main types of equity compensation plans, Incentive Stock Options (ISOs) and Restricted Stock Units (RSUs). Would you like to file an 83(b) election for your ISO or RSU but don't know how to go about it? Here are the steps you need to follow to file an 83(b) election:

1. Fill out an 83(b) election form and sign it.

2. Search for an 83(b) election template online or ask your accountant for one.

  • Make three copies of a signed 83(b) election.
  • Attach a cover letter to the IRS to your signed 83(b) election form.
  • Mail the signed 83(b) election and cover letter to the appropriate IRS office.
  • Send the other signed 83(b) election form to your employer and keep the third copy for your records.

As you can see, the process of 83(b) election form can be lengthy and tedious for both employers and employees. And that doesn't even put into consideration that there's a deadline for 83(b) election filing. That's right; you don't have all the time in the world to make an 83(b) election.

How Long Do You Have to Make an 83(b) Election?

An 83(b) election must be filed with the IRS within 30 days of being granted the shares. Filing an 83(b) election form minimizes the tax burden on your stock options and keeps the upfront costs of exercising low. Late 83(b) election filing could have serious tax implications on your stocks in the future.

In other words, if you forget to make an 83(b) election within 30 days of completing your early exercise, you will have to pay capital gains on your shares when they finally vest. DoNotPay ensures that you file your 83(b) election form in a timely manner and helps you avoid unexpected tax bills down the road.

What Is the Best Way to Fill Out an 83(b) Form?

To make an 83(b) election, you have to fill out the form, attach a cover letter, and mail a hard copy to the IRS. And you have to do all that within 30 days of being granted the shares. It's a time-consuming process for both employers and employees. Luckily, there's an easier alternative.

DoNotPay offers a quick and convenient way to make employees fill out the 83(b) election form digitally. DoNotPay's 83(b) Election Form Filing Product can expedite the process to help companies with many employees make 83(b) election before the deadline.

What Are the Steps to Filing an 83(b) Election With DoNotPay?

DoNotPay's automated system simplifies the 83(b) election filing process considerably, saving users a massive amount of personal time. If you want to file an 83(b) election form but don't know where to start, DoNotPay has you covered in three easy steps:

  1. Enter the email address of the employee/shareholder you want to grant shares to.

     

  2. Upload a copy of the Restricted Stock Purchase Agreement.

     

  3. And that's it. We'll email the grantee with a special link so they can access the DoNotPay 83(b) Election Form Filing Product and file their forms automatically. You'll be able to see the completed task on your dashboard, and the grantee will receive a tracking number to track the status of their shipment as well.

     

Why Use DoNotPay to Make an 83(b) Election?

Using DoNotPay to make an 83(b) election is:

It’s fastWe make sure that your filing is accurate and timely.
It’s easyNo complicated processes take up your time.
It’s successfulRest assured that your filing will go through when you use DoNotPay.

What Else Can DoNotPay do?

In addition to 83(b) election filing, there are many other issues DoNotPay can help you solve. These include:

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