83(b) Election Explained For Employers

Key takeaways

1. 83(b) election lets your employees pay ordinary income tax upfront, based on the grant-date value for RSAs and the spread between the grant-date value and exercise price for stock options. This reduces their tax liability by allowing them to prepay taxes when the value of the units is lower.
2. There’s a strict 30-day deadline for filing an 83(b) election from the grant date. Once filed, it cannot be reversed.
3. If an employee files an 83(b) election, the employer must report compensation in the year of the grant and can take the corresponding tax deduction in that same year.
4. It’s best suited for low-value shares with growth potential; however, it's risky if the shares are later forfeited (usually when employees leave before vesting).

What is the 83(b) election?

The 83(b) election is an Internal Revenue Code (IRC) tax provision that allows recipients of restricted stock and stock options to pay taxes immediately upon receiving their grant, rather than deferring payment until the shares/options vest or are exercised later. 

Under normal circumstances, the IRS taxes RSAs (Restricted Stock Awards) when they vest and stock options (NSOs) when they are exercised, which is typically years after their grant, when the stock value may have increased significantly. 

Making the 83(b) election changes the timing of taxation.

With the 83(b) election, employees can lock in their tax liability at the grant date based on the fair market value (FMV) and the purchase price. The election only applies to equity subject to vesting requirements. 

Important: 83(b) elections are irrevocable

Once filed, 83(b) elections cannot be reversed, even if the employee forfeits the shares or their value drops. Employees who leave before vesting or see the share value decline won't receive tax refunds or deductions for taxes already paid. 

This means it’s important to educate your employees about the permanent commitment and the need for careful consideration before filing.

How the 83(b) election works

The 83(b) election lets employees choose to pay all taxes upfront based on the grant-date value of their RSAs or on the spread between their exercise price and FMV of stock options.

Without the 83(b) election: 

• For restricted stock, the IRS treats each vesting event as a taxable event. As shares vest, employees owe ordinary income tax on the FMV of the vested portion (minus any purchase price).
• For stock options, tax is triggered at exercise on the difference between the strike price and the FMV at exercise.

When you file for the 83(b) election:

• For restricted stock, employees’ tax liability is based on the grant-date value, rather than the value at vesting. The stock price is typically lower at issuance.
• For stock options, employees early exercise at grant and are taxed on the difference between the strike price and the FMV at the time of early exercise, which is often nearly equal. By paying the ordinary income tax upfront, any future appreciation on the equity compensation becomes eligible for capital gains treatment.

Tax implications of the 83(b) election

When your employee files the 83(b) election, it accelerates their entire tax obligation to year one, regardless of the vesting schedule.

Let’s see how tax treatment changes by equity type.

Tax implications of the 83(b) election on Restricted Stock Awards (RSAs)

RSAs are usually issued at a very low price, especially in early-stage startups. 

When an 83(b) election is filed, the employee recognizes ordinary income tax up front on the FMV of the shares at grant. Since they are priced nominally (e.g., $0.001 per share), this tax is often very low. Any future appreciation is then taxed at capital gains rates when the shares are sold.

Impact on employer tax deductions: When an employee files an 83(b) election, your company's tax deduction timing changes as well. You can claim the compensation expense deduction in the same year the employee recognizes the income. 

However, proper documentation is crucial. If you fail to report the compensation on the employee's Form W-2 correctly, you risk losing your tax deduction unless you can prove the employee properly reported the income. 

Let’s say a co-founder is granted 1,000,000 shares, subject to a 4-year vesting schedule (25% every year) and the shares are valued at $0.01, during the time of grant. 

If an 83(b) election is filed, here’s how taxation plays out:

• Taxable income at grant = $0.01 × 1,000,000 = $10,000
  
• Ordinary income tax owed at this stage (assuming a 35% tax rate) = $3,500
  

But without an 83(b) election:

The co-founder pays ordinary income tax on each 250,000-share tranche as it vests, based on the increasing FMV:

• Year 1 FMV = $0.50 → Taxable = $125,000 ($0.50 ✕ 250,000)
  
• Year 2 FMV = $1.00 → Taxable = $250,000 ($1.00 ✕ 250,000)
  
• Year 3 FMV = $2.50 → Taxable = $625,000 ($2.50 ✕ 250,000)
  
• Year 4 FMV = $4.00 → Taxable = $1,000,000 ($4.00 ✕ 250,000)
  
• Total taxable income over four years = $2 million ($125,000+$250,000+625,000+$1,000,000)

At a 35% tax rate, this leads to $700,000 in tax liability by the end of the vesting tenure.

Tax implications of the 83(b) election on stock options (ISOs and NSOs) 

83(b) election for ISOs

Incentive Stock Options (ISOs) are not subject to regular income tax at exercise, but they do trigger Alternative Minimum Tax (AMT). 

For early-exercisable options, the election locks in the AMT based on the current spread (the difference between the strike price and the current FMV), before the options have even vested. 

Without the election and early exercising, AMT on ISOs is triggered when the employee actually exercises their options, typically after they have vested. 

If the company’s value has increased, the AMT liability can be significantly higher than if the options were exercised earlier and paired with an 83(b) election.

For example, an employee receives 10,000 early-exercisable ISOs at a strike price of $1/share. The FMV at grant is also $1/share. 

If the employee exercises immediately and files an 83(b) election, they lock in $0 for AMT purposes. Even if the company’s value rises significantly later, no additional AMT is triggered at the time of exercise.

But if the employee doesn’t opt for an 83(b) election and waits to exercise until the shares vest (and the value has increased to, say, $10 per share) they’ll trigger AMT on a $9 spread per share, resulting in $90,000($9 ✕ 10,000) of AMT adjustment. 

83(b) election for NSOs

Non-qualified Stock Options (NSOs) trigger ordinary income tax on the spread at exercise. 

If an employee opts for 83(b) election, they must early exercise their NSOs (at grant, before vesting) and pay tax on the spread at an early date when values are typically lower.

Without an 83(b) election, employees generally wait until their options vest before exercising. In that case, the tax is triggered at the time of exercise, based on the FMV then, which is often significantly higher, leading to a larger tax liability.

Now, for example, an employee gets 1,000 NSOs with a strike price of $1 per share. At the time of the grant, the FMV is $1.10. If the employee exercises early and files an 83(b) election, they pay ordinary income tax on the $0.10 spread. That's just $100 ($0.10 ✕ 1,000) in taxable income.

But, if they don’t make the election and instead wait to exercise after the shares vest, and by then the FMV has grown to $5 per share, they’ll owe tax on the $4 spread, which is $4,000 ($4 ✕ 1,000) in taxable income.

The 83(b) election helps them lock in the lower tax while the company’s value is still low.

For a better understanding of how ISOs and NSOs taxation work, read our comprehensive guide on ISOs vs NSOs here.

Why employers need to understand the 83(b) election

A timely 83(b) election reduces the employer’s tax reporting burden for restricted stock or stock options. It lets the company disregard vesting for tax purposes. This means:

• No income or employment tax withholding obligations as shares vest
• No need to determine FMV at each vesting date
  

But if the election is not made, the company must calculate the FMV of the shares on every vesting date for RSAs, report the income on the employee’s W-2, withhold applicable taxes, and pay the employer’s share of employment taxes on that value.

Failing to withhold and report correctly creates significant compliance risk. If these obligations are ignored over multiple years, the company may have to issue corrected W-2s and both the company and employees might need to amend prior years’ tax returns.

When to file an 83(b) election?

As an employer, you'll need to help employees understand the factors that influence their 83(b) election decision. Here's when your employees can consider filing 83(b):

• When the restricted stock has minimal value per share at the time of grant, and the strike price for stock options is close to or equal to the current market value.
• The employee doesn't expect to leave the company and forfeit unvested stock.

How to file an 83(b) election?

Your employees must file an 83(b) election within 30 days of the grant date. This deadline is absolute and cannot be extended. The election form must include:

• Name
• Address
• Social security number (SSN)
• Number of shares
• Type of shares
• Issuing company name
• Date granted or purchased
• FMV on the above date
• Amount paid for shares
• Your gross income

The IRS accepts handwritten, electronic, or digital signatures on election letters.

Employees should prepare three copies of their election form and send the original to the IRS service center where they file taxes. It’s strongly recommended to use certified mail with a return receipt, as it becomes crucial proof of timely filing.

Your company receives one copy of the completed election, which should be maintained in the employee's personnel file. This documentation proves they made the election and supports your tax reporting obligations. 

Employees must also attach a copy to their federal tax return for that year and keep one copy for their personal records.

IRS form 15620 for 83(b) elections

The IRS has introduced optional Form 15620 as a standardized way to make Section 83(b) elections. While taxpayers may still submit a custom statement, Form 15620 simplifies compliance and adds fields for taxpayer details and a ‘penalty of perjury’ declaration. 

Electronic filing isn’t yet available, but this release signals movement in that direction.

Get your free 83(b) election employer checklist

Well-managed 83(b) elections benefit everyone. Employees who file often save substantial taxes, making their equity compensation more valuable, while your company benefits from simplified administration and reduced withholding paperwork.

Download the 83(b) election employer checklist.

Remember, your employees have just 30 days to make this irrevocable decision. 

Our comprehensive checklist ensures you handle 83(b) elections correctly, from documentation to withholding.  Download it now.

FAQs on the 83(b) election

1. Can an employer require or prohibit an employee from making an 83(b) election?

Yes, an employer can require or prohibit an employee from making an 83(b) election. While the election is ultimately the employee’s responsibility, it impacts the employer’s tax deduction timing, reporting duties, and payroll withholding obligations.

2. Can an employer file the 83(b) election on behalf of the employee?

No, an employer cannot file the 83(b) election on behalf of an employee. Only the individual who receives the property can make the election, and they must assess and file it themselves.

3. What are the risks if an employee misses the 83(b) deadline?

If an employee misses the 83(b) deadline, they’ll be taxed as their shares or options will be taxed as they vest or are exercised, often at higher values. This can lead to a larger tax bill over time, especially if the company’s value increases.