Because they are so important, we list some costly errors to watch out for when it comes to taxes on equity compensation:
danger If you are going to file an 83(b) election, it must be within 30 days of stock grant or option exercise. Often, law firms will take a while to send you papers, so you might only have a week or two. If you miss this window, it could potentially have giant tax consequences, and is essentially an irrevocable mistake—it’s one deadline the IRS won’t extend. When you file, get documentation from the post office as well as a delivery confirmation, and include a self-addressed, stamped envelope for the IRS to send you a return receipt. (Some people are so concerned about this they even ask a friend to go with them to the post office as a witness!)
danger Watch out for the AMT trap we’ve already discussed.
danger If you exercise your options, and your income had been from consulting rather than employment (1099, not W-2), you will be subject to the self-employment tax, which consist of both the employer and the employee side of FICA. In addition to owing the normal income tax, this means you will owe the Social Security tax component (6.2%) up to the FICA wage base, and you will owe the Hospital Insurance component (2.9%) on all of your income.
danger Thoughtfully decide when to exercise options. As discussed, if you wait until the company is doing really well, or when you are leaving, the delay can have serious downsides.