Silicon Valley Outraged at Proposed Tax Reforms on Stock Options

Silicon Valley’s venture capitalists are outraged that the U.S. Senate’s proposed tax reform makes employee stock option compensation less attractive and forces companies to pay employer taxes.

Silicon Valley is often referred to as the “Valley of the Democrats,” because of the area’s strong endorsement of the social justice agenda — plus the fact that about 83 percent of tech company political contributions went to Democrats in the last election cycle.

Venture capitalists claim it is good social justice policy for start-up companies to pay employee compensation mostly in the form of incentive performance stock options, rather than wages. But avoiding wage compensation also eliminates paying employer taxes.

Under the current tax treatment, employee profits from appreciated stock options are not taxed until after options have vested over a proscribed period, and until the future date the options are exercised into shares. That allows employees to avoid market risk and delay paying taxes until a later exercise date of their choosing.

But the “Tax Cuts and Jobs Act” would tax the employee’s profit on appreciated stock options on the date they vest. That would expose employees to the immediate risk of market loss and generally force quick option exercise to sell shares to pay capital gains taxes.

California employer taxes are personal liabilities of company owners and executives that are not dischargeable in bankruptcy. The formula for California’s employer tax includes:

• Social Security: a federal insurance providing benefits to retired employees and the disabled. Employers must pay 6.2% of taxable wages on the first $113,700.
• Medicare: a federal health insurance for people over 65 and certain people with disabilities. Employers must pay 1.45% of taxable wages on the first $200,000, then 2.35% of taxable wages beyond that.
• California Unemployment: a state insurance program that provides benefits to unemployed workers, the disabled, and those on paid family leave. The employer tax rate varies from 1.5% to 6.2% of taxable wages on the first $7,000 wages, depending on the Employment Development Department.
• Federal Unemployment: the Department of Labor oversees state programs that provide unemployment benefits to eligible workers. Employers pay of 1.2% of employee taxable wages on the first $7,000 per employee.
• Employment Training Tax: ETT provides funds to train employees in targeted industries to improve California competitiveness. Employers must pay an extra 0.1% of taxable wages on the first $7,000.

The United States total unfunded liabilities for Social Security and Medicare represent legal obligations of the federal government and are estimated at about $90.6 trillion, according to the Cato Institute. The Medicare Trust Fund is expected to run out of money in 2028 and the Social Security Trust Fund is expected to run out of money in 2034.