Two engineers want to exercise their options. This is the tax they pay and the filing you owe.
An ESOP lets an employee buy shares later, at a price fixed today. At exercise, tax falls due on the gap between that price and the fair value that day. It is taxed as salary, and deducted through payroll the same month. We set up the scheme, run that tax, and file what changes with the ROC.
- Tax worked out before anyone exercises
- Cap table and books that agree
- A reply the same working day
An example of how it goes.
What we do for you.
- We set up the scheme and the pool, with the approvals it needs.
- This is the plan that sets aside shares for your team, the block already named in your term sheet. We prepare the scheme document. We also get shareholder approval before a single option is offered.
- We send out grant letters your team can read with ease.
- Vesting is the schedule that spreads when staff can use their options, often over four years. Each letter states this plainly, so nobody has to guess what they hold or when.
- We account for the cost of options as they vest.
- The value of options granted is spread as a cost over the years staff take to earn them. Your monthly profit already carries that cost, so the number does not move when your audit happens.
- We work out the tax due when options are exercised.
- The gap between the exercise price and that day's fair value is taxed as salary. We deduct that tax through payroll, the same as any other pay. A merchant banker works out that fair value for a company that is not listed, and we arrange it.
- We handle the startup deferral, and the tax due when shares are later sold.
- A startup holding the separate tax certificate can let an employee put off that tax. Payment then falls due on the earliest of three dates. Those are 48 months after the end of the tax year of exercise, the day the employee leaves, or the day the shares are sold. The amount owed does not change, only the date. When the shares are eventually sold, tax is due again, this time as a capital gain, not salary.
- We file the paperwork, and give your team a one-page note on what they hold.
- Every exercise means new shares allotted, and a return of allotment goes to the Registrar of Companies. We update your cap table, the list of who owns what of the company, the same week. Your team also gets a one-page note on what they hold, when it vests, and what it costs to exercise.
Your side of it.
Small things, sent any way you like. We do the rest.
- The ESOP scheme, or the clause in your term sheet that sets it up
- Your grant letters, or a list of who was promised what and when
- Exercise requests, as your team sends them in
The scheme and the yearly valuation are agreed in writing before they start, and exercises are handled inside payroll once the scheme is set up.
What founders ask about ESOPs.
What tax does my employee pay and when?
The gap between the exercise price and that day's fair value is taxed as salary. It is deducted through payroll, the same month. If your company holds the separate startup tax certificate, that payment can wait. It falls due on the earliest of three dates. Those are 48 months after the end of the tax year of exercise, the day the employee leaves, or the day the shares are sold. When the shares are sold, tax is due again, this time as a capital gain.
What is the ESOP tax deferral for startups?
It lets an employee put off paying tax on the exercise gap, instead of paying it that month. Only a startup holding the separate tax certificate can offer it, not every startup recognised by the government. Payment falls due on the earliest of three dates. Those are 48 months after the end of the tax year of exercise, the day the employee leaves, or the day the shares are sold. The tax amount itself does not change, only when it is paid.
Do options cost the company anything before they are exercised?
Yes, in the accounts, even though no cash changes hands. The value of the options granted is spread as a cost over the years your team takes to earn them. Your monthly profit already carries that cost, so the number does not move when your audit happens.
Can I give options to advisers or contractors?
The employee stock option scheme is for employees and directors on your payroll. Options for an adviser or a consultant are set up separately, under their own agreement, and we prepare that too.
What happens to options when someone leaves?
Unvested options usually lapse on the date they leave, under the terms in the grant letter. Vested options can usually be exercised for a set window after they leave, again as the letter states. We update the cap table and the scheme records the same week.