An ESOP is an employee stock ownership plan that lets companies pay their employees with stock of the company. These ESOPs benefit the company and the employee since the worker has an incentive to work hard to make the company successful and increase profitability to receive a dividend. ESOPs also offer tax advantages for employees and the company. Continue reading for more information about ESOP compensation.
An ESOP acts as a profit sharing plan as a part of employee benefits. The company creates a trust fund that contributes new shares of company stock or cash to buy shares. Most of these trusts are tax deductible with certain limits. These shares are allocated into individual employee’s accounts. Full time employees typically qualify for this form of benefit. As an employee spends more time working for the company, the more shares they receive in their account. This is called vesting. An employee must be 100% vested within three to six years. If an employee leaves the company, they receive their stock that the company can buy back at fair market value.
Employees can avoid paying tax by capital gains being taxed lower than income and appreciated stock is tax-deferred. The employees’ wealth grows inside the company tax free and you only pay the taxes when you cash out your stocks. Dividends that the employee receives as a shareholder are tax deductible.
ESOPs reduce employees’ salary because of the compensation they receive in stocks. Instead of receiving just a fixed salary, they receive this variable income option in addition to a lower salary. This allows employees to have an overall higher income. The compensation received through the ESOP is not free money, but a portion of your salary. The advantage is receiving capital gains on appreciating stock that you have helped appreciate through your hard work at the company.
To learn more about your ESOP, be sure to connect with your human resources department and a financial advisor. A financial advisor can help you apply all tax advantages that are offered to you through your ESOP. Here at Eagle Grove Advisors, we are ready to help.