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Subject:   question about stock
Date:   Fri, 28 Feb 2003
From:   Lisa

Michael:

I am trying to find information about using stock, in lieu of money, to pay contractors at our company. Do you know where I can find something about this?

Thank you for your help.

Lisa

Answer

Date:   Mon, 24 Mar 2003

Hello Lisa,

I'm sorry I can't give you a specific reference. There are books available on employee benefits from various publishers that can give you some information. There are also some web sites oriented to employers. You can save a lot of time if you consult with a tax advisor who is familiar with the area.

Here is a start. The two principal alternatives for compensating independent contractors are stock grants and non-qualified stock options. Assuming these items are fully vested, a stock grant is taxable to the contractor at the time of grant based on the fair market value of the stock; a non-qualified stock option is taxable on the date of exercise, based on the excess of the fair market value of the stock over the option price. The company receives corresponding tax deductions according to the amount taxable to the contractors. The taxable income should be reported to the contractors as non-employee compensation on Form 1099-MISC. Some states are now requiring withholding for compensation of non-resident contractors. (For example, a Nevada resident engineer works as an independent contractor on software development at a California business location. The California business should withhold California income taxes for the California-source income.)

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.