What happens to my SARS if I leave the company?

Full question:

I am currently an employee at a Seattle based internet company that is an s-corp. I have been with the company for almost 4 years. I do have SARS and as a foreigner on an H-1B visa, my SARS are not converting into options since an S-Corp cannot have foreign ownership. If I would leave the company in the near future, what would happen to my SARS? Will I be able to keep them? If the company then converts to a C corp (that is the plan) in the future, will my vested SARS automatically be converted into options?

Category: Corporations
Date: 04/07/2025
State: Washington

Answer:

A stock appreciation right (SAR) allows you to receive a bonus equal to the increase in the company's stock over time. Unlike stock options, you don’t pay an exercise price; you simply receive the appreciation in cash or stock. SARs can typically be exercised after they vest.

If you leave your company, the fate of your SARs depends on the specific plan rules regarding vesting and expiration. Generally, vested SARs may be exercised for a limited time after your employment ends, but this can vary by plan. You should review your employer's SAR plan for details.

If the company later converts to a C corporation, there may be provisions for converting vested SARs into options, but this will also depend on the plan's terms. Check the specific plan rules for any changes upon conversion to a C corporation.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

What income is not subject to self-employment tax?

Certain types of income are not subject to self-employment tax, including wages from an employer, interest income, dividends, and rental income from real estate, provided you are not a real estate dealer. Additionally, income earned through an S corporation as a shareholder is typically not subject to self-employment tax, as it is considered passive income. However, any salary you receive as an employee of the S corporation is subject to payroll taxes. Always consult a tax professional for specific advice regarding your situation.

Which entity is not subject to self-employment tax?

S corporations are generally not subject to self-employment tax on the income they generate. Instead, shareholders of an S corporation only pay self-employment tax on their salaries, not on the distributions they receive from the corporation. This can provide tax advantages compared to sole proprietorships or partnerships, where all income is subject to self-employment tax. However, it's essential to comply with IRS regulations regarding reasonable compensation for services rendered.

What is the tax loophole for S Corp?

One tax advantage of an S corporation is that it allows income to be passed through to shareholders without being subject to corporate income tax. This means that profits are taxed only at the individual level, potentially reducing the overall tax burden. Additionally, shareholders can receive distributions that are not subject to self-employment tax, unlike income from sole proprietorships. However, it's crucial to ensure that salaries paid to shareholders are reasonable to avoid IRS scrutiny.

Are S Corp owners subject to FUTA?

S corporation owners who work as employees are subject to Federal Unemployment Tax Act (FUTA) taxes on their wages. However, distributions received by shareholders are not subject to FUTA. This means that while owners must pay unemployment taxes on their salaries, they can benefit from not having to pay these taxes on profit distributions. It's important to maintain proper payroll records and comply with all tax obligations.

Is an S Corp subject to self-employment tax?

An S corporation itself is not subject to self-employment tax. However, any salary paid to shareholder-employees is subject to payroll taxes, including Social Security and Medicare taxes. Distributions received by shareholders from the S corporation are not subject to self-employment tax, which can provide tax savings. It's essential to ensure that the salary paid is reasonable to comply with IRS guidelines.