How To File 83(b) Election With The IRS
I will keep it short on why you might want to file a 83(b) Election with the IRS and focus more on how to file it, since that is likely why you are reading this. This article from Cooley Law does a pretty good job explaining in much greater detail why making an 83(b) Election with the IRS can be beneficial, as well as this explanation from Wealthfront. Now on to the how to file your 83(b) election instructions.
In the last five years I have helped almost 150 founders through the incorporation process. Time and time again I keep seeing one step of that process, create mass confusion for founders and early employees. Filing the 83(b) Election with the IRS within 30 days of receiving a stock grant or stock options.
I will keep it short on why you might want to file a 83(b) Election with the IRS and focus more on how to file it, since that is likely why you are reading this. This article from Cooley Law does a pretty good job explaining in much greater detail why making an 83(b) Election with the IRS can be beneficial, as well as this explanation from Wealthfront.
In short, an 83(b) election means you will be taxed on the value of your stock at the time of the grant, rather than as it vests. For founders & early employee’s of new company’s, whose stock is usually priced at $0.0001 per share at incorporation, it can make a lot of logical sense to pay upfront tax while the price of the company is still very low. Now on to the how to file your 83(b) election instructions.
IMPORTANT 83(b) Election Deadline: You must file your 83(b) Election with the IRS within 30 days of receiving your stock grant or stock options! The filing is officially deemed to have been made on the date the 83(b) is mailed from the post office; i.e. the postmark date.
If your stock is not subject to vesting, then you can ignore this process and move on with your day. 83(b) Elections are not required for those without a vesting schedule.
Steps To File Your 83(b) Election
Start with gathering the required 83(b) form documents:
If your lawyer has provided you with 83(b) election forms you may use those. If not, then print four copies of page 9 from the 83(b) Election IRS form here.
You also need to include a cover letter to the IRS, a template of which can be found here: IRS Cover Letter Template.
Complete and review all four copies of the 83(b) election form, review, date, manually sign and insert the taxpayer identification number for the taxpayer (and spouse, if applicable).
Look up where to send the completed forms by finding your state on the "Where to File Paper Tax Returns With or Without a Payment” page of the IRS website.
Enclose the following in an envelope to be mailed:
Two copies of your completed 83(b) election.
Completed cover letter.
A return self addressed envelope with stamps. The IRS will keep the first copy of your election and stamp the second copy. The self addressed envelope will be used to mail back to you the second stamped copy of your election, so you can keep it on file in your records.
Mail the enclosed envelope with 2 completed copies of your 83(b) election & cover letter to the IRS via USPS certified mail and request a return receipt.
Send another completed 83(b) election to your company.
Keep another completed 83(b) election for your personal records.
Thats it! Be on the lookout in the mail to receive that second stamped copy back from the IRS. And as always, be sure to keep your records someplace safe like a fireproof lock box.
Other Founder Guides you might find helpful:
Disclaimer: I offer this post only as helpful guidance as I am not a lawyer or certified accountant. You should still research on your own and consult your accountant or lawyer if you are uncertain of the process.
Why The Senate's Plan To Tax Employee Options At Vesting Is Bad For Startups
At this moment there are new Tax Reform plans proposed in both the House of Representatives and the Senate. The current proposal in the Senate plans to tax employee stock options at the moment of vesting, instead of when they are exercised, as is currently done.
Startups are the envy of the world for how innovative and fast moving they can be. However, they often lack the amount of cash in the bank required to pay employees a salary that is competitive with the top tech companies such as Google, Facebook, Amazon, etc. To compensate for this, they give their employees an equity ownership in the company. Typically that equity vests monthly or quarterly over the span of four years. Here is a quick primer for anyone that wants to get brought up to speed on how "Startup Equity & Vesting" works.
When an employee is given stock options, those options are illiquid. Meaning they can not be sold or transferred for money until the company has a liquidable event (e.g., an exit such as an acquisition or going public). So when employees receive options they usually have to wait years before being able to turn them into cash.
At this moment there are new Tax Reform plans proposed in both the House of Representatives and the Senate. The current proposal in the Senate plans to tax employee stock options at the moment of vesting, instead of when they are exercised, as is currently done. The House of Representatives has already removed this provision from their proposal.
What is the tangible effect? If passed, startup employees would be forced to pay taxes on these equity options, regardless of any realization of actual value.
As Fred Wilson said, "Taxing equity compensation upon vesting makes no sense. If this provision becomes law, startup and growth tech companies will not be able to offer equity compensation to their employees. We will see equity compensation replaced with cash compensation and the ability to share in the wealth creation at your employer will be taken away."
Passing this law will make it extremely difficult for startups to compete with bigger corporations for high-quality talent. I am personally signing on to a letter addressed to Sen. Orrin Hatch, Chair of the Senate Finance Committee, to oppose the proposed new plan and ask that Section III(H)(1) be removed from the Senate bill. If you would like to speak up as well (with your local representative), you can find your senators here and your representative here, along with the phone number to their office.