What is Phantom Stock?

This is a type of ‘synthetic equity’ Companies offer phantom stock to give employees stock-like upside without transferring actual equity.
It is a contractual right to receive cash or sometimes stock in the future, with the amount measured by reference to the value of a specified number of shares.
It is not actual stock ownership. A participant typically does not receive voting rights, dividend rights, or shareholder status under state corporate law merely by receiving phantom units.
The participant’s rights are usually those of a general unsecured creditor, and the arrangement is often unfunded.
Full-value phantom stock pays the entire value of the phantom shares (as opposed to appreciation only phantom stock).

A phantom stock plan may provide either:
- a payment equal to the full value of a stated number of shares, or
- only the appreciation in value over a base amount, depending on plan design
For example, if an employee is granted 1,000 full value phantom units and the company’s stock is worth $10 at grant and $18 at payout, the employee receives $18,000, representing the entire share value at payout rather than just the $8,000 appreciation.

Phantom stock is generally taxed as deferred compensation
This means no tax at grant and compensation income when paid or settled
The employer reports the payout as wages on your Form W-2 and deducts the same amount as the compensation in the year you recognize the income.

Employers usually withhold on a large payout at the supplemental wage rate of 22% for amounts up to $1 million, and 37% on any portion above $1 million.
If you are in a higher tax bracket you could have a significant amount owing on April 15.
Income tax and payroll tax do not always fall in the same year. Social Security and Medicare taxes, under the special timing rule for the Federal Insurance Contributions Act (FICA) , can apply when your award vest, even though income tax applies later at payout.