By Barbara Baksa. It’s not often that the worlds of professional sports and equity compensation intersect. True, I have a Google alert set up for “stock options” that sometimes returns articles about how the stock of football players impacts their career options (as in “Joe Schmo played really well in the last game; his stock is really rising”), but that’s not what I’m referring to. I’m talking about domestic mobility. While we are struggling with how compensation is taxed when employees travel from one state to another, this is an issue that professional sports has been dealing with for a long time now.
Two recent articles about how professional athletes are taxed at the state level caught my eye this summer: “Welcome, Kevin Durant. Now about your California income taxes…” (by Kathleen Pender, in the San Francisco Chronicle, July 5, 2016) and “Is Your Client’s W-2 Correct? If You Said Yes, Think Again!” (by Michael Feinstein, in the Tax Advisor, June 9, 2016). Thanks to Marlene Zobayan of Rutlen Associates for bringing the latter article to my attention.
Here are a few concepts discussed in the articles that are applicable to equity compensation:
1. If the employee is a resident in a state that has income tax, 100% of the employee’s compensation, including any gains on stock options or awards, is generally taxable in that state. This is true even if the compensation is also taxable in another state.
2. Generally, compensation earned for work performed in another state (that has income tax) is also taxed in that state. For example, when your favorite non-Californian athletes play in California, they have to pay California state income tax on the portion of their compensation attributable to those games. In the context of stock compensation, this could apply to employees on assignment in another state, employees in remote locations that regularly travel to headquarters, employees in any location that travel to other states for work, employees that live in one state and commute to another for work, and a host of other situations.
3. The amount of income attributable to the employee’s non-resident state is generally determined by dividing the days worked in that state, referred to as “duty days,” by the total days over which the compensation is earned. In the context of stock compensation, the period over which the compensation is earned is most likely the vesting schedule.
4. Employees may be able to claim a credit in their state of residence for taxes paid in other states. Unlike a tax deduction, which reduces the income subject to tax, a credit is applied to the employee’s ultimate tax liability.
I’ve used the words “generally,” “typically,” and “most likely” a lot in this blog entry. It’s not that I have a fear of commitment, it’s that there are fifty states and they all write their own tax laws. As with anything that is legislated at the state level, the laws can, and do, differ by state.
*This article was originally posted on the NASPP blog.
Barbara Baksa, CEP, is the Executive Director of the NASPP, holding that position since 2005. The NASPP is a leading membership association devoted to meeting the needs of stock plan professionals. There are nearly 6,000 members whose responsibilities relate, directly or indirectly, to stock plan design and administration, including compensation and human resources professionals, stock plan administrators, securities and tax attorneys, accountants, compensation consultants, corporate secretaries, transfer agents, stock brokers, and software vendors.