Press ‘E’ for Election: The 83(b) Goes Digital
An “83(b) election” is a tax saving tool that can help workers save money when they receive restricted stock or other equity from a company. The IRS recently made it easier to file these elections, including providing an online filing option.
What is “restricted” stock?
Companies oftengive stock or partner/membership interests (equity) to employees and contractors to incentive them, or because the company can’t pay full compensation in cash, especially in start-ups. Usually, equity comes with restrictions such as:
- The worker can’t sell the equity right away (a “transferability” restriction);
- The worker has to stay with the company for a certain period of time to keep the equity (a “vesting” restriction); or
Under the default tax rule under Code section 83, the worker pays tax when one of the restrictions ends. The amount of tax is based on the fair market value (FMV) of the equity at that time.
What is an 83(b) election and why make it?
The 83(b) election lets the worker choose to pay tax on the FMV of the restricted equity immediately, instead of waiting for the restrictions to end. Most workers prefer to pay the taxes immediately because:
- The equity is usually worth less when it is issued, so the tax is lower; and
- It can be hard to track when exactly the restrictions end under the default rules.
Keep in mind, the 83(b) election is time-critical. The worker must file the 83(b) election with the IRS within 30 days after receiving the equity. Traditionally, the 83(b) election is filed by mailing a form to the IRS and giving a copy to the company. When submitting a physical form, we recommend workers mail the form using certified mail, return receipt requested, or by a nationally recognized overnight courier (such as FedEx®) with a tracking system.
In November 2024, the IRS released PDF-fillable, standardized Form 15620 Section 83(b) Election, which workers use instead of preparing their own forms. However, even with the new form, workers still must remember to file the physical form with the IRS within 30 days.
What other steps has the IRS taken?
As part of its modernization efforts, the IRS now allows taxpayers to file the 83(b) election online, via the IRS website.
To file the 83(b) election online:
- Create an account with me, the IRS’s multifactor authentication platform.
- After logging into the ID.me website, select “Connect with ID.me” button for the IRS’s accounting and individual platform, for accessing your IRS online account.
- Use the “Find Forms” search bar to look for Form 15620.
- Select the “Online” option follow the steps to file the 83(b) election online.
Before using the online platform, be aware of two limits to the online form:
- You can only enter a maximum of 999,999 securities in one submission; and
- The online form only allows two-decimal places for the FMV and the amount paid for the restricted equity.
Even with these limits, the standardized form and online filing system is a breath of fresh air and is another positive step in the IRS’ modernization efforts.
