Executive Tax Reference Guide | Northern Trust Executive Tax Reference Guide | Northern Trust
Skip to content

Executive Tax Reference Guide

Share

Share this article on FacebookShare this article on XShare this article on LinkedinShare this article via EmailPrint this article

Planning is essential to optimize tax treatment for the many forms of executive compensation.

The varied forms of compensation in executive compensation plans lead to a myriad of income tax consequences, dependent on type and timing. There are also gift, estate and generation skipping transfer taxes to consider in your wealth plan. The following guide provides an overview of the tax treatments for common forms of executive compensation, including salary and bonus, stock options, stock awards and wealth transfers. As each situation is unique, you will want to work with your advisors to build a nuanced plan to address your specific needs.

Income Tax

At a glance

The table below outlines the U.S. federal income tax rules that apply to common forms of executive compensation.

table_768px_income_tax_at_a_glance_chart_01 S ala r y O r di n a r y in c ome U pon r eciept Bonus or pe r for m an c e in c ent i v e ( c a s h) O r di n a r y in c ome U pon r eciept Non-q u alified sto c k option O r di n a r y in c ome E x e r cise — Gai n / ( loss) upon disposition C api t al gains t r eatment D ate o f sale R estricted sto c k a w a r d - no §83 ( b) election O r di n a r y in c ome V esting — Gai n / ( loss) upon disposition C api t al gains t r eatment D ate o f sale R estricted sto c k a w a r d - §83 ( b) election O r di n a r y in c ome D ate o f g r ant — Gai n / ( loss) upon disposition C api t al gains t r eatment D ate o f sale D i v idends O r di n a r y in c ome U pon r eciept — O n sto c k w ith §83 ( b) election P r efer r ed r ate U pon r eciept Defer r ed c ompensation O r di n a r y in c ome U pon r eciept COMPENSATION TAXATION TIMING
table_768px_income_tax_at_a_glance_chart_01 S ala r y O r di n a r y in c ome U pon r eciept Bonus or pe r for m an c e in c ent i v e ( c a s h) O r di n a r y in c ome U pon r eciept Non-q u alified sto c k option O r di n a r y in c ome E x e r cise — Gai n / ( loss) upon disposition C api t al gains t r eatment D ate o f sale R estricted sto c k a w a r d - no §83 ( b) election O r di n a r y in c ome V esting — Gai n / ( loss) upon disposition C api t al gains t r eatment D ate o f sale R estricted sto c k a w a r d - §83 ( b) election O r di n a r y in c ome D ate o f g r ant — Gai n / ( loss) upon disposition C api t al gains t r eatment D ate o f sale D i v idends O r di n a r y in c ome U pon r eciept — O n sto c k w ith §83 ( b) election P r efer r ed r ate U pon r eciept Defer r ed c ompensation O r di n a r y in c ome U pon r eciept COMPENSATION TAXATION TIMING
table_375px_income_tax_at_a_glance_chart_01 Salary Non-qualified stock option Bonus or performance incentive (cash) — Gain/(loss) upon disposition — Gain/(loss) upon disposition — Gain/(loss) upon disposition Restricted stock award - no §83(b) election Restricted stock award - §83(b) election Dividends — On stock with §83(b) election Deferred compensation Ordinary income Ordinary income Ordinary income Ordinary income Capital gains treatment Capital gains treatment Ordinary income Capital gains treatment Ordinary income Preferred rate Ordinary income Upon reciept Upon reciept Exercise Date of sale Vesting Date of sale Date of grant Date of sale Upon reciept Upon reciept Upon reciept COMPENSATION TAXATION TIMING

Cash compensation: salary and bonus

Salary and bonus are taxed as ordinary income at the time of receipt. Federal income tax, state income tax and federal payroll tax apply.

table_1920px_income_tax_at_a_glance_chart_02 10% $0 - $10,275 $0 - $14,650 $0 - $10,275 $0 - $20,550 12% $10,275 - $41,775 $14,650 - $55,900 $10,275 - $41,775 $20,550 - $83,550 22% $41,775 - $89,075 $55,900 - $89,050 $41,775 - $89,075 $83,550 - $178,150 24% $89,075 - $170,050 $89,050 - $170,050 $89,075 - $170,050 $178,150 - $340,100 32% $170,050 - $215,950 $170,050 - $215,950 $170,050 - $215,950 $340,100 - $431,900 35% $215,950 - $539,900 $215,950 - $539,900 $215,950 - $323,925 $431,900 - $647,850 37% $539,900 + $539,000 + $323,925 + $647,850 + SINGLE TAX RATE HEAD OF HOUSEHOLD MARRIED FILING SEPARATELY MARRIED FILING JOINTLY OR SURVIVING SPOUSE 2022 ORDINARY INCOME TAX BRACKETS
table_768px_income_tax_at_a_glance_chart_02 10% 12% 22% 24% 32% 35% 37% TAX RATE $0 - $10,275 $10,275 - $41,775 $41,775 - $89,075 $89,075 - $170,050 $170,050 - $215,950 $215,950 - $539,900 $539,900 + SINGLE $0 - $14,650 $14,650 - $55,900 $55,900 - $89,050 $89,050 - $170,050 $170,050 - $215,950 $215,950 - $539,900 $539,000 + HEAD OF HOUSEHOLD $0 - $10,275 $10,275 - $41,775 $41,775 - $89,075 $89,075 - $170,050 $170,050 - $215,950 $215,950 - $323,925 $323,925 + MARRIED FILING SEPARATELY $0 - $20,550 $20,550 - $83,550 $83,550 - $178,150 $178,150 - $340,100 $340,100 - $431,900 $431,900 - $647,850 $647,850 + MARRIED FILING JOINTLY OR SURVIVING SPOUSE 2022 ORDINARY INCOME TAX BRACKETS
table_375px_income_tax_at_a_glance_chart_02 10% 12% 22% 24% 32% 35% 37% TAX RATE $0 - $10,275 $10,275 - $41,775 $41,775 - $89,075 $89,075 - $170,050 $170,050 - $215,950 $215,950 - $539,900 $539,900 + SINGLE $0 - $14,650 $14,650 - $55,900 $55,900 - $89,050 $89,050 - $170,050 $170,050 - $215,950 $215,950 - $539,900 $539,000 + HEAD OF HOUSEHOLD $0 - $10,275 $10,275 - $41,775 $41,775 - $89,075 $89,075 - $170,050 $170,050 - $215,950 $215,950 - $323,925 $323,925 + MARRIED FILING SEPARATELY $0 - $20,550 $20,550 - $83,550 $83,550 - $178,150 $178,150 - $340,100 $340,100 - $431,900 $431,900 - $647,850 $647,850 + MARRIED FILING JOINTLY OR SURVIVING SPOUSE 2022 ORDINARY INCOME TAX BRACKETS

Stock Options

Incentive Stock Options

Incentive stock options (ISOs) are not taxed at grant or exercise. Instead, tax is predicated on whether the disposition is qualified or disqualified. A qualified disposition is stock disposed (sold or transferred) more than two years from the grant date and more than one year after exercise. A disqualified disposition is one that does not meet the holding period requirements of a qualified disposition. Unlike NQSOs, ISOs are subject to a $100,000 annual exercisable grant limitation.

table_1920px_income_tax_at_a_glance_chart_03 Typically none GRANT Ordinary income on difference between stock price and the exercise price EXERCISE If held 12 months or less, short-term capital gains taxed as ordinary income If held more than 12 months, long-term capital gains tax treatment DISPOSITION
table_768px_income_tax_at_a_glance_chart_03 Typically none Ordinary income on difference between stock price and the exercise price If held 12 months or less, short-term capital gains taxed as ordinary income If held more than 12 months, long-term capital gains tax treatment GRANT EXERCISE DISPOSITION
table_375px_income_tax_at_a_glance_chart_03 Typically none Ordinary income on difference between stock price and the exercise price If held 12 months or less, short-term capital gains taxed as ordinary income If held more than 12 months, long-term capital gains tax treatment GRANT EXERCISE DISPOSITION

Non-qualified stock options

The most widely granted options are non-qualified stock options (NQSOs), which are taxed as ordinary income when exercised and receive capital gain/(loss) treatment upon sale.

table_1920px_income_tax_at_a_glance_chart_03 Typically none GRANT Ordinary income on difference between stock price and the exercise price EXERCISE If held 12 months or less, short-term capital gains taxed as ordinary income If held more than 12 months, long-term capital gains tax treatment DISPOSITION
table_768px_income_tax_at_a_glance_chart_03 Typically none Ordinary income on difference between stock price and the exercise price If held 12 months or less, short-term capital gains taxed as ordinary income If held more than 12 months, long-term capital gains tax treatment GRANT EXERCISE DISPOSITION
table_375px_income_tax_at_a_glance_chart_03 Typically none Ordinary income on difference between stock price and the exercise price If held 12 months or less, short-term capital gains taxed as ordinary income If held more than 12 months, long-term capital gains tax treatment GRANT EXERCISE DISPOSITION

Restricted stock awards

A restricted stock award (RSA) is payment in the form of restricted shares. An RSA transfers the stock to the recipient upon grant, subject to vesting restrictions. Unlike options, RSAs come with voting and dividend rights immediately since the recipient actually owns the stock upon grant. The fair market value of the stock is taxed as ordinary income when the restriction lapses (i.e., vests). Upon sale, subsequent gains/(losses) receive capital gains/(loss) treatment. Section 83(b) of the Internal Revenue Code permits recipients of an RSA to elect to pay ordinary income tax on the value of the stock at grant, with subsequent stock appreciation or loss being treated as long-term capital gain/(loss) upon sale.

table_1920px_income_tax_at_a_glance_chart_05 Yes No I.R.C. SECTION 83(B) ELECTION The value of the stock at the time of grant will be subject to ordinary federal income tax, state income tax and federal payroll tax None GRANT All subsequent appreciation or loss (i.e., value at disposition less value at grant) is taxed at capital gains rate A portion of subsequent appreciation or loss (i.e., value at disposition less value at vesting) is taxed at capital gains rate DISPOSITION None The value of stock at the time of vesting will be subject to ordinary federal income tax, state income tax and federal payroll tax VESTING Taxed at favorable qualified dividend rate Treated as ordinary income DIVIDENDS
table_768px_income_tax_at_a_glance_chart_05 Yes No I.R.C. SECTION 83(B) ELECTION The value of the stock at the time of grant will be subject to ordinary federal income tax, state income tax and federal payroll tax None GRANT All subsequent appreciation or loss (i.e., value at disposition less value at grant) is taxed at capital gains rate A portion of subsequent appreciation or loss (i.e., value at disposition less value at vesting) is taxed at capital gains rate DISPOSITION None The value of stock at the time of vesting will be subject to ordinary federal income tax, state income tax and federal payroll tax VESTING Taxed at favorable qualified dividend rate Treated as ordinary income DIVIDENDS
table_375px_income_tax_at_a_glance_chart_05 No None Treated as ordinary income The value of stock at the time of vesting will be subject to ordinary federal income tax, state income tax and federal payroll tax A portion of subsequent appreciation or loss (i.e., value at disposition less value at vesting) is taxed at capital gains rate I.R.C. SECTION 83(B) ELECTION GRANT DIVIDENDS VESTING DISPOSITION Yes The value of the stock at the time of grant will be subject to ordinary federal income tax, state income tax and federal payroll tax Taxed at favorable qualified dividend rate None All subsequent appreciation or loss (i.e., value at disposition less value at grant) is taxed at capital gains rate I.R.C. SECTION 83(B) ELECTION GRANT DIVIDENDS VESTING DISPOSITION

Gift, Estate and Generation-skipping Transfer Taxes

The federal government imposes gift, estate and generation-skipping transfer taxes on the transfer of property during life and at death. The majority of states also impose an estate tax on transfers at death. Although you may reside in a state with no estate tax (i.e., Arizona, California, Colorado, Florida or Texas), if you own a vacation home in a state that imposes estate tax, part of your estate may be subject to state estate tax. With intentional planning and coordination with the income tax, you may optimize the use of available transfer tax exclusions and minimize the overall tax burden to you, your estate and beneficiaries.

table_1920px_income_tax_at_a_glance_chart_06 Annual gift tax exclusion (per recipient) $16,000 Annual gift tax exclusion for gifts to non-US citizen spouse $164,000 Direct payment of college tuition or medical bills Unlimited – excluded from annual limit Gift and estate tax basic exclusion (adjusted for inflation) $12,060,000 Maximum marginal gift and estate tax rates 40% GST tax exemption (adjusted for inflation) $12,060,000 GST tax rate 40% 2022 GIFT, ESTATE AND GENERATION-SKIPPING TRANSFER TAX RATES
table_768px_income_tax_at_a_glance_chart_06 Annual gift tax exclusion (per recipient) $16,000 Annual gift tax exclusion for gifts to non-US citizen spouse $164,000 Direct payment of college tuition or medical bills Unlimited – excluded from annual limit Gift and estate tax basic exclusion (adjusted for inflation) $12,060,000 Maximum marginal gift and estate tax rates 40% GST tax exemption (adjusted for inflation) $12,060,000 GST tax rate 40% 2022 GIFT, ESTATE AND GENERATION-SKIPPING TRANSFER TAX RATES
table_375px_income_tax_at_a_glance_chart_06 2022 GIFT, ESTATE AND GENERATION-SKIPPING TRANSFER TAX RATES Annual gift tax exclusion (per recipient) Annual gift tax exclusion for gifts to non-US citizen spouse Direct payment of college tuition or medical bills Gift and estate tax basic exclusion (adjusted for inflation) Maximum marginal gift and estate tax rates GST tax exemption (adjusted for inflation) GST tax rate $16,000 $164,000 Unlimited – excluded from annual limit $12,060,000 40% $12,060,000 40%

Access the Northern Trust 2022 Federal Taxes Reference Guide for all current tax rates.

Executive

Develop Your Strategy

Our advisors can help you optimize your planning.

THE NORTHERN TRUST INSTITUTE

Proven Advice for Moments that Matter

Learn More
On Purpose

Subscribe for Our Insights

Sign up to receive our On Purpose publication to help you achieve your financial goals as intended.

Tags

Personal financeTaxes

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

Related Articles

  • Check
    Navigate to Plan for the Future of Your Art Collection
    The Art of Collecting

    Plan for the Future of Your Art Collection

    Understand the financial implications of transferring your collection to family or charity.

  • Check
    Navigate to Engaging the Rising Generation
    Money Masterclass

    Engaging the Rising Generation

    Prepare future family leaders for success.

  • Check
    Navigate to Money and the Mind
    Money Masterclass

    Money and the Mind

    Stan Treger is using psychology to help others understand “the why” behind their money story.

  • Check
    Navigate to College-Bound Planning: Key Financial and Health Care Decisions
    Money Masterclass

    College-Bound Planning: Key Financial and Health Care Decisions

    Understand key financial and healthcare planning decisions for families of college-bound students.

Explore Specialized Advice

    Slide 1 of 5
  • Check
    Navigate to Business Owner

    Business Owner

  • Check
    Navigate to Executive

    Executive

  • Check
    Navigate to Multigenerational Families

    Multigenerational Families

  • Check
    Navigate to Elevating Women

    Elevating Women

  • Check
    Navigate to Family Offices

    Family Offices