One way you, as an employer, can attract and retain top talents to your organization today is by offering them lucrative and attractive compensation. But what happens if your organization can’t afford to pay a more lucrative salary? In this case, one thing you can do is to offer them stock options. However, for you to offer your employees this type of incentive, you certainly need to meet certain regulatory requirements, such as the IRS requirements of Section 409A and the 409A valuation process.
In case you don’t know, a 409A valuation is a crucial process that ensures you stay in compliance with the IRS regulations when issuing your employees stock options. Complying with 409A can save you and your employees from severe tax penalties.
In the rest of this post, you’ll discover a few more reasons why you certainly need to engage a valuation consultant to undergo the 409A valuation process. In addition, you’ll discover why choosing Eton Venture Services as your go-to 409A valuation consultant is worth it.
Reasons to consider the 409A valuation process
As you already know, there are tons of reasons why employers need to take the 409A valuation process seriously. Apart from shielding your employees from severe tax consequences, a well done valuation can benefit your business in the following ways:
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Staying compliant is necessary
The Internal Revenue Service (IRS) mandates business owners grant any deferred compensation, such as stock options, at no less than their fair market value. To guarantee compliance, most business owners choose to obtain 409A valuation whenever they’re offering top talents lucrative incentive compensation, in the form of stock options and other types of deferred compensation. The Internal Revenue Code (i.e., tax law) provides an incentive known as the “safe harbor” for businesses to hire a third party expert valuation consultant in order to ensure a reasonable fair market value determination when it comes to tax compliance. This means the stock options are provided to employees with an exercise price that is at least equal to the fair market value of the organization’s common or ordinary shares.
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Proper compensation
The 409A valuation process using a third party expert valuation consultant ensures that the stock options being issued for compensation to employees are properly priced. This makes it possible for employees to avoid sudden tax liabilities upon issuance of the stock option.
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Low turnover rate
With the large costs that go into hiring top talents, many organizations hate to see their best employees leave. High turnover rate in an organization can be pretty costly and to avoid this issue, one effective solution a company needs is to do all it can to retain its talents.
Yes, you can always attract and retain your top talents by compensating them with non-compliant, taxable stock options. or other taxable compensation. But what happens if the employees receive stock options only to find out they are improperly priced (i.e., issued at less than fair market value)? In this case, you’re most certainly going to experience a high turnover rate over time. With a proper 409A valuation, however, which can be done by 409A valuation consultants at Eton Venture Services, you can avoid such a scenario.
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Avoid penalties
Employers must comply with Section 409A and conduct a 409A valuation to avoid costly penalties. Incorrectly priced stock options can lead to compliance issues, affecting the business in multiple ways. A proper 409A valuation is essential to protect staff from the immediate taxation of deferred compensation.
Granting stock options with an exercise price below fair market value can result in:
- Immediate taxation of non-compliant options, added to the affected employees’ gross income for that year.
- Possible additional penalties, including interest on underpaid taxes.
- Potential need to amend tax returns for both the company and employed individuals.
- State-imposed penalties, depending on business location and state regulations.
Effective Tips for Avoiding 409A Penalties
Understanding the significance of correctly pricing deferred compensation, such as stock options, under Section 409A is crucial to avoid penalties. Here are key strategies to minimize these risks:
- Maintain Accurate Documentation: Keep detailed and accurate records. Proper documentation enables correct calculation of plan deferrals, ensuring compliance.
- Regular 409A Valuations: Conduct 409A valuations frequently. This practice helps in staying updated with fair market values and maintaining compliance.
- Consult with Experts: Engaging with top 409A valuation consultants, like Eton Venture Services, can significantly reduce the risk of penalties. Their expertise ensures proper valuation and adherence to regulatory standards.
Visit Eton Venture Services today to better understand how to follow a proper 409A valuation process can benefit your organization.
