Welcome back to Founders University, our core curriculum designed to provide startup founders with the basics needed to launch a company while minimizing costly missteps or mistakes.
For our next session of Founders University, we provide a quick overview of basic tax concepts as they relate to compensation and investment income. Partner Lynda Galligan gives this overview as a way for founders to understand how stock options get taxed.
Ready. Set. Learn!
To understand how an option is taxed, it’s important to understand some basic tax concepts.
Compensation – like salary or a cash bonus – is typically taxed at ordinary income tax rates. In 2013, these rates can be up to 39.6 percent for federal taxes, plus state taxes, plus payroll taxes such as FICA.
Investment income is taxed differently – typically it is taxed at capital gains rates. For stock that has been held for at least one year, the long-term capital gains rates in 2013 are between 15-20 percent, plus state taxes.
It’s worth noting that capital gains taxes are generally more favorable to a taxpayer than are income taxes.
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