Calling all company directors. You could be considered “specified employees” under the Internal Revenue Code, a label that has major ramifications for deferred compensation, according to Caroline Hayday and Sasha Belinkie of Cleary Gottlieb Steen & Hamilton in this recent blog post. “Specified employees of publicly-traded companies must wait at least six months following a separation from service to receive payments of deferred compensation triggered by such a separation,” explain the authors, or else they could face “draconian penalty taxes.”
What’s lesser known is that nonemployee directors can also be subject to the same fines, say Hayday and Belinkie. How so? The IRC dictates that self-employed people “shall be treated as an employee” and the Internal Revenue Service considers directors fees self-employment income, they explain. In addition, a prominent drafter of this section of the regulations, Dan Hogans, has publicly stated that directors can also fall into this category based on their share of ownership since an “employee” is defined as anyone who is a 5 percent owner of the company, or a 1 percent owner making more than $150,000 in annual compensation.
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