You must pay federal, state, and in some cases local taxes on income.
State tax rates and rules vary significantly state to state. Since federal rates are much higher than state rates, you usually think of federal tax planning first.
In general, federal tax applies to many kinds of income. If you’re an employee at a startup, you need to consider four kinds of federal tax, each of which is computed differently:
Ordinary income tax — the tax on your wages or salary income, as well as investment income that is “short-term”
Other employment tax — Social Security and Medicare taxes that are withheld from your paycheck
Long-term capital gains tax — taxes on investment gains that are “long-term” are taxed at a lower rate than ordinary income
Alternative Minimum Tax (AMT) — an entirely different kind of tax that has separate rules and only applies in some situations
Ordinary income tax applies in the situations you’re probably already familiar with, where you pay taxes on salaries or wages. Tax rates are based on filing status, i.e., if you are single, married, or support a family, and on how much you make, i.e. which income bracket you fall under.
As of 2015, there are income brackets at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% marginal tax rates. Be sure you understand how these brackets work, and what bracket you’re likely to be in. There is sometimes a misconception that if you move to a higher bracket, you’ll make less money. What actually happens is when you cr...
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...-com busts. Now more people know about it, but it’s still a significant obstacle to plan around. (Note that if your AMT is for events prior to 2008, you’re off the hook.)
If you are granted ISOs or NSOs at a low strike price, and the bargain element is zero, and might be cheap to exercise and won 't trigger taxes. So assuming the company allows it, it makes sense to early exercise immediately (buying most or all of the shares, even though they’re not vested yet) and simultaneously file an 83(b) election.
Section 83(b) elections are elections to be taxed on the receipt of property even though you might have to forfeit or give back the property to the company. You can make an election on the receipt of stock, but you cannot make the election on the receipt of an option or an RSU because options and RSUs are not considered property for purposes of Section 83(b).
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