I'd say the bulk of stock-based compensation these days is RSUs, and RSUs are treated as deferred income with income taxes due at settlement (either a liquidity event or on vesting). It's taxed exactly the same as income -- including Social Security and Medicare taxes.
The next most popular choice are NSOs, which are taxed as ordinary income when exercised on the difference between the strike price and the fair market value -- and you do in fact pay Social Security and Medicare taxes. Once you hold the stock, it's no longer compensation, it's an asset you've bought and paid for.
Third most popular are ISOs which do have some preferential treatment, although it's rare to be issued ISOs at anything other than a very early stage company, and at that point, you're likely to exercise early, and then once again, you've bought and paid for an asset and the it's no longer your compensation.
Founder shares are also assets and not compensation, and taxed as such, assuming you file your 83(b) election in a timely fashion.
I think it's fair to say that the rare issuance of ISOs notwithstanding, stock compensation is taxed as ordinary income and is exposed to social security and medicare taxes.
Finally -- and most importantly, IMO -- social security tax stops accruing after you've earned $142,800USD. Chances are if you're earning stock compensation in the Bay Area, that's covered by your base pay plus bonuses, if applicable.
Yes it's a very blatant hole that needs to / should be fixed. There's also no reason there should be a cut-off on FICA taxation as you scale up in income. The Democrats should target those easy taxation wins (if they can stop for a moment trying to get tax cut handouts for higher income persons in their coastal cities in the form of SALT deductions; pretty hilarious to watch the Dems argue in favor of raising taxes on nearly everything that moves while simultaneously arguing that people earning six figures desperately need a tax cut - solely because it's overwhelmingly for their voters in affluent blue cities).
There is a real reason FICA has a cap, because it's not an income tax. It's sole purpose is for a retirement & medical benefits program that was sold as fair to all when introduced. Forcing someone to pay 10X or 100X over their lifetime for the same benefits as someone else doesn't strike anyone as fair.
> Forcing someone to pay 10X or 100X over their lifetime for the same benefits as someone else doesn't strike anyone as fair.
Respectfully, I disagree, that's just progressive taxation and it's true of every other aspect of our tax system. Someone who pays 10X or 100X more taxes than me isn't getting 100X the value out of our roads, bridges, or the army.
It's fair IMO because of the marginal utility of money. If you make $50,000 per year, $10,000 means a lot. If you make $10M, $10K is a rounding error or a fun weekend in Vegas. A progressive tax system is IMO flat when plotted against the marginal utility of the value accrued. Think of it in terms of burgers. I require 3 burgers a day to live. I get paid 3. If you try and take 1, I go hungry. That burger is worth a lot to me. On the other hand if I get paid 10 burgers, and you try and take 1, it means nothing to me. That burger is worth a lot less because I'm already so full. Same is true in the abstract in terms of dollars.
Again, SS was designed to be a fairly funded retirement plan, where your contributions determined most of your payout. The amount of the contributions were designed to fund those payouts, and nothing more.
Of course we can remove the contribution cap, but now it's not a retirement plan funding mechanism, it's an income tax that has no justification for retirement plan funding.
You can easily reach the hard cap on future SS payments while earning barely more than the median pay in the US during your career. So every dollar you contribute above that earns you nothing. Someone who contributes 100x gets nothing for that.
