What is a Stock Appreciation Right (SAR)

SARs is a form of "synthetic equity" used by companies to reward employees or service providers with the economic benefits of stock ownership without granting actual shares.

It is a contractual promise to receive cash or stock tied to the company's value, you hold no real shares and no voting rights when you are granted SARs. 

SARs is all about appreciation, it pays only the gain above a set base price.

At the time of grant, a "base price" is established, which is typically the fair market value (FMV) of the stock on the grant date. When the SAR is exercised or paid out, the recipient receives the difference between the FMV at the time of exercise and the original base price.

For example, if an employee is granted 1,000 SARs with a base price of $50, and the stock value increases to $75 at the time of payout, the employee is entitled to the $25 per share appreciation. In this scenario, the total payout would be $25,000. If the stock price does not increase above the base price, the SAR provides no value to the recipient.

SARs can be settled in two primary ways: Cash-Settled: The employer pays the appreciation value in a lump sum of cash. Stock-Settled: The employer provides the recipient with a number of actual shares of stock equal in value to the appreciation amount.

Generally, there is no tax when the SAR is granted, assuming it was an unfunded promise to receive future cash and no current economic benefit was received.

For a cash-settled SARs, it is taxed as ordinary compensation income when cash is paid or made available on exercise or other payment event 

For a stock-settled SARs, it is taxed as ordinary compensation when the employee exercises the SAR and acquires beneficial ownership of the stock. The amount is the fair market value of the stock received at that time, less any amount paid by the employee.

SARs will be taxed to you as wages.  For FICA purposes, they are not treated as deferred compensation which triggers tax when rights vest. 

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.