This Kind of Corporate Benefit Your Employees Don’t Welcome.

Stock Grants and Phantom Income

You own a small and very successful private company. You know that you would never have become so successful without the dedication and hard work of your trusted key managers. You have one particularly valuable manager who you would like to reward with some ownership of the company. He is a valued manager and has asked you before if you would consider giving him some equity. You decide that a 10% ownership of the common stock of the company would be in order, so you grant him shares equivalent to a 10% ownership while you maintain your 90% ownership. You know your manager will be very thankful. Next April your new co-owner comes to you and asks you how he’s going to pay his federal and state taxes on the $300,000 in compensation income (the taxes for which could be as high as $90,000) that he has received when he has no cash to pay the taxes.