The Secret All Startup Founders Should Know NOW: 83(b)

When you receive restricted stock awards, you need to decide whether you want to make a Section 83(b) tax election. What is an 83(b) election? Well, in the IRS’ words: “It provides generally that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of the fair market value of the property as of the first time that the transferee’s rights in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount (if any) paid for the property is included in the service provider’s gross income for the taxable year which includes such time.”

Forgive the technical — and what does that mean? Put simply, an 83(b) can save a startup founder a tremendous amount of money.

Without the Section 83(b) Election

With no Section 83(b) election, you must recognize taxable compensation income from your restricted stock award in the year the restriction causing the substantial risk of forfeiture lapses. For example, you would recognize income when vesting occurs.

The taxable amount equals the excess of the stock’s value when the restriction lapses over the amount you paid for the stock (if anything). Your employer must withhold federal income tax and applicable federal employment taxes on the amount treated as compensation.

With the Section 83(b) Election