Business: ”What are the tax implications of being paid in equity?”
Alison and Phillip discuss the tax implications of being paid in equity. They explain that being paid in equity means receiving stock or ownership in a company instead of cash. While there may be no immediate tax implications for receiving “sweat equity", once the equity is converted to unrestricted shares or there is a payout, it becomes taxable income. They emphasize the importance of consulting with an attorney and understanding the legal and tax implications before entering into any equity arrangement.
| **Timestamp** | **Summary** |
| ------------- | ----------- |
| 0:00:01 | Introduction to the podcast and topic of tax implications of being paid in equity |
| 0:02:00 | Explanation of being paid in equity and its tax implications |
| 0:04:50 | Reporting equity as income on tax returns |
| 0:06:37 | Discussion on startups and tax implications of equity |
| 0:08:25 | Tax implications when converting sweat equity to equity |
| 0:10:51 | Importance of reading operating agreements and consulting an attorney |
| 0:11:42 | Risk and reward of sweat equity |
| 0:13:30 | Reminder of tax impact and timing of sweat equity |
1. Being paid in equity means receiving ownership in a company instead of cash.
2. Equity received as compensation is considered a taxable event and must be reported as income.
3. Individuals who receive equity as compensation may need to set aside money to pay the taxes when they convert the equity to unrestricted shares.
4. There is potential for significant financial gain with equity compensation, but also the risk of the equity becoming worthless if the business fails.
5. It is important to consult with a qualified financial advisor and tax professional before accepting equity as compensation.
- "When you get paid in equity, you could say, hey, you could pay me $20 million for doing this deal, or you can give me $20 million worth of stock to do the deal." - Philip Washington Jr.
- "If you have the entrepreneurial spirit and see somebody with a business that you find interesting or that you have the right skill set for, it'd be a great way to invest in it without having to necessarily outlay cash by doing sweat equity." - Alison Reiff-Martin, CPA
- "Sweat equity doesn't always have to convert or sometimes just doesn't convert because the business doesn't work out." - Alison Reiff-Martin, CPA
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Phillip Washington, Jr. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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