Do you pay taxes on phantom stock?

Phantom stock can, but usually does not, pay dividends. When the grant is initially made, there is no tax impact. When the payout is made, however, it is taxed as ordinary income to the grantee and is deductible to the employer.

Is phantom stock a good idea?

Phantom stock is not a good idea if the company is planning on issuing them to most or all employees, especially if the shares will be paid out when the employee leaves the company or retires. In that case, phantom shares may be ruled illegal because of the Employee Retirement Income and Security Act (ERISA).

What happens to phantom stock when a company goes public?

The phantom stock becomes a liability that the company must eventually convert to either cash or company stock. In privately held businesses, company stock is rarely an option. employees like these plans as any phantom stock they receive is not taxable until converted into cash by the company.

How do you value phantom stock?

The unit value for the phantom plan is set equal to the unit value of the real shares. This approach is used when the company desires to keep the value of real shares and phantom shares equal (using the same formula). For example, when buy/sell agreements use the same formula used for the phantom plan.

How does Phantom carry work?

A private equity firm has proposed a “phantom carry” plan for its non-partner employees. The firm creates funds which invest in companies over the course of, for example, 15 years. Periodically, the fund will pay earnings of those companies out to investors. The payment of these earnings is “carry.”

Can phantom stock be issued to non employees?

The grant of a phantom award usually isn’t a taxable event because no shares or other property are transferred to the award recipient. You can’t withhold any taxes for non-employees. Most phantom awards are paid on or soon after vesting, so FICA, FUTA, and income tax withholding are all due at once.

Can an S Corp issue phantom stock?

Consequently, an S corporation may have a phantom stock plan without terminating its S corporation election. To avoid losing the “S election,” the phantom stock plan must be structured carefully. Some of the criteria for an effective phantom stock plan for an S corporation includes: Liquidation rights must be limited.

How do I set up phantom equity?

He shared with me a five-step plan for creating a phantom stock program that will incentivize top employee performance without sacrificing control of your company.

1. Understand what you are – and aren’t – offering.
2. Set a proper valuation.
3. Create your shares.
4. Decide how to award stock.
5. Set a reward schedule.

How do you make a phantom stock plan?

Are phantom stock securities?

To the extent that phantom stock is considered a security, private companies generally rely on the exemption from registration under Rule 701 of the Securities Act of 1933, which allows a company to offer securities to employees under a written compensatory plan if: (1) certain disclosure requirements are met and (2) …

How do I terminate a phantom stock plan?

Termination of Plan A majority of a party’s Board of Trustees may terminate this Plan with respect to the Acquiring Fund or Target Fund, as appropriate, at any time before the applicable Effective Time if: (i) the party’s conditions precedent set forth in Sections 7 or 8, as appropriate, are not satisfied or (ii) the …