If you’re a startup employee, you may have heard of an 83b Cover Letter. When it comes to equity compensation, it’s essential to understand what these letters entail, why you should file one, and how to fill it out. In this article, we’ll shed light on what 83b Cover Letters are and how to make the most of them.
What is an 83b Cover Letter?
An 83b Cover Letter is an official document that applies to individuals with restricted stock options or restricted stock units (RSUs). When you receive RSUs as part of your company’s compensation package, you pay taxes only after the shares vest. The period between the grant date and the vesting date is known as the restricted period.
During the restricted period, you don’t own the shares outright, meaning they’re subject to forfeiture. If you wish to pay tax on the shares’ current value instead of their value at the time of vesting, you need to file an 83b Cover Letter.
By filing this letter with the IRS within 30 days of your grant, you notify the agency that you intend to pay tax on the shares’ present value. Your tax bill will reflect the stock’s value on the grant date, meaning you’ll pay less tax than you would at the vesting date.
Why Should You File an 83b Cover Letter?
Filing an 83b Cover Letter has two primary benefits:
1. Taxation
By filing this letter, you’ll be required to pay taxes on the shares’ present value rather than their future value, resulting in less tax liability. Suppose you believe that your company’s stock value will increase significantly within the restricted period. In that case, it makes financial sense to file an 83b Cover Letter.
2. Flexibility
When you file an 83b Cover Letter, you take ownership of the shares immediately, giving you the right to sell them at your discretion. It ensures more significant flexibility and control over your financial occasion should you need liquidity.
How to File an 83b Cover Letter?
Filing an 83b Cover Letter may seem like an intimidating process, but it’s relatively straightforward:
-
Download the 83b form from the IRS website.
-
Complete the form by filling in the necessary personal information, date of the transfer or grant, and the value of the property you received from the grantor.
-
Sign and date the form (make sure to include your Social Security Number or Tax ID).
-
Mail the original signed form to the IRS, ensuring it’s postmarked within 30 days of the grant date.
-
Mail a copy of the same form to your employer, as it’s a requirement.
Key Takeaways
-
An 83b Cover Letter is an official document used to report restricted stock unit (RSU) compensation.
-
You may save on taxes by filing this letter, as you’re taxed on the stock’s present value rather than its future value.
-
You must file the letter within 30 days of the RSU grant.
-
Filing an 83b Cover Letter is not reversible, so consider all possibilities before submitting this document.
-
You should keep the fully executed original and a copy of your 83b Cover Letter and avoid losing it as you may require it later.
FAQ
Q: Can I file an 83b Cover Letter after the 30-day period has passed?
A: No. The IRS is strict when it comes to filing deadlines. If you file after the 30 days, you’ll miss out on the tax savings.
Q: What happens if I don’t file an 83b Cover Letter?
A: Generally, you’ll pay a higher tax bill if you don’t file as you’ll be taxed on the shares’ future value, which will likely be higher than the current value.
Q: Can I file an 83b Cover Letter for my stock options?
A: No. 83b Cover Letters apply to restricted stock options or RSUs only. Stock options aren’t included.