Can a Section 83(b) Election Be Used for S Corp Restricted Stock? (w/Examples) + FAQs

Yes, you can absolutely file a Section 83(b) election for restricted stock in an S Corporation. However, this simple “yes” hides a dangerous conflict between your personal tax goals and the survival of your company. The core problem is created by Treasury Regulation § 1.1361-1(b)(3), which dictates that filing an 83(b) election instantly transforms you from an employee into a legal shareholder. The immediate negative consequence is that if the company fails to treat you identically to all other shareholders for distributions, it violates the S Corp “one class of stock” rule, triggering the automatic and catastrophic termination of its S Corp status. ¹

This isn’t a theoretical risk; it’s a tripwire. In fact, mistakes regarding S Corp stock ownership and distribution rules are a primary reason companies accidentally lose their valuable S Corp status, forcing them into a more complex and expensive tax structure. ⁴ This single, personal tax form can inadvertently dismantle the company’s entire tax foundation.

Here is what you will learn to avoid that fate:

📜 The Hidden Corporate Threat: Discover how your personal Section 83(b) filing can accidentally trigger the “corporate death penalty” for your S Corp and what specific rule causes it.
💰 Massive Tax Savings vs. Total Forfeiture: Learn the exact math behind the 83(b) election to see how it can convert huge tax bills into manageable ones, but also how you could lose every dollar of tax you paid.
✍️ A Perfect, Mistake-Proof Filing: Get a line-by-line guide to filling out and filing the IRS Form 15620 for your 83(b) election, ensuring you meet the unforgiving 30-day deadline.
🤝 Founder vs. Employee Battleground: Understand the conflicting goals of the S Corp founder (who fears compliance nightmares) and the employee (who wants tax savings), and how to align them.
📉 Real-World Scenarios: Walk through three detailed stories—a booming success, a disappointing failure, and an early departure—to see the real financial consequences of your choice.

Deconstructing the Core Components: S Corps, Restricted Stock, and the 83(b) Tax Gamble

The S Corporation: A Tax-Favored but Fragile Structure

An S Corporation, or S Corp, is a special type of company that gets its name from Subchapter S of the Internal Revenue Code. ⁵ Think of it as a hybrid, offering the personal asset protection of a regular corporation but with the tax benefits of a partnership. ⁶ This means if the business is sued or has debts, your personal assets like your house and bank accounts are generally safe. ⁴

The biggest advantage is pass-through taxation. ⁶ An S Corp doesn’t pay its own federal income taxes. Instead, all the company’s profits and losses are “passed through” to the shareholders, who then report them on their personal tax returns. ⁹ This structure cleverly avoids the “double taxation” that hits regular C Corporations, where profits are taxed once at the company level and again when paid out to shareholders. ⁶

However, this tax benefit comes with extremely strict rules from the IRS. To qualify as an S Corp, a company must be a U.S. corporation, have 100 or fewer shareholders, and those shareholders must be U.S. citizens or residents (no corporations, partnerships, or non-resident aliens allowed). ⁸ Most importantly, an S Corp can have only one class of stock. ⁸ This last rule is the Achilles’ heel that creates all the danger when dealing with restricted stock.

Restricted Stock Awards (RSAs): Your Ownership Is Conditional

A Restricted Stock Award (RSA) is a grant of actual company shares to an employee, founder, or advisor. ¹² Unlike a stock option, which is a right to buy stock later, an RSA gives you ownership of the shares right away. ¹³ You might even get voting rights and dividends from day one, depending on the company’s plan. ¹⁵

The key word is “restricted.” Your ownership isn’t absolute. It’s tied to a “substantial risk of forfeiture,” which means you could lose the shares if you don’t meet certain conditions. ⁴ The most common condition is a vesting schedule. ⁴

A typical vesting schedule is four years with a one-year “cliff.” ¹² This means you get zero shares for the first year. If you leave before your one-year anniversary, you walk away with nothing. ¹⁸ After the one-year cliff, 25% of your shares vest. The rest usually vest in equal monthly chunks over the next three years. ¹³ This system is designed to incentivize you to stay with the company for the long haul. ¹³

The Section 83(b) Election: A High-Stakes Tax Choice

Normally, with restricted stock, you pay taxes as your shares vest. The taxable amount is the fair market value (FMV) of the shares on the vesting date, and it’s taxed as ordinary income, just like your salary. ¹⁷ If your company’s value is skyrocketing, this can lead to massive tax bills each year, often when you have no cash from the stock to pay them.

The Section 83(b) election is a special choice you can make under the tax code to change this timing. ⁴ By filing an 83(b) election, you choose to pay tax on the entire value of your stock grant upfront, in the year you receive it. ²² The goal is to do this when the stock’s value is extremely low, maybe just fractions of a penny per share. ²²

You pay ordinary income tax on that tiny initial value. After that, vesting is no longer a taxable event. All future appreciation in the stock’s value is treated as a capital gain, which is taxed at a much lower rate than ordinary income if you hold the stock for more than a year. ²⁵ This can save you a fortune in taxes.

But there are two massive risks. First, the election is irrevocable. If you file the election, pay the tax, and then leave the company before your shares vest, you forfeit the stock and you cannot get the taxes you paid back. ¹⁷ Second, you have an incredibly strict, non-negotiable deadline: the election must be mailed to the IRS within 30 days of the stock grant date. ⁴ Miss it by one day, and the opportunity is gone forever.

The Corporate Landmine: How Your 83(b) Election Threatens the S Corp

The “One Class of Stock” Rule Explained

The S Corp’s “one class of stock” rule is simple but deadly serious. It means that every single share of the company’s stock must have the exact same rights to distributions and liquidation proceeds. ¹ If the company pays out profits, every share must get its identical, pro-rata portion.

The IRS doesn’t care about differences in voting rights. A company can have voting and non-voting stock and still be a compliant S Corp. ¹ The rule is all about the money. If any agreement or action gives one shareholder different economic rights than another, the IRS can rule that a second class of stock has been created. ³

This isn’t just a paperwork violation. The moment a second class of stock is created, the company’s S Corp status is automatically terminated. ¹ The company instantly reverts to being a C Corporation, subjecting it and all its shareholders to the double taxation they chose the S Corp structure to avoid. ¹⁰

The Critical Status Change: From Employee to Shareholder

Here is where your personal tax decision collides with corporate law. Treasury Regulation § 1.1361-1(b)(3) creates a clear dividing line based on whether you file an 83(b) election.

If you do not file an 83(b) election, the IRS considers your unvested restricted stock as not truly “outstanding.” For tax purposes, you are not yet a shareholder. ¹ This means the S Corp can make distributions to its other, fully-vested shareholders and legally exclude you, because in the eyes of the IRS, you don’t own the stock yet. The “one class of stock” rule is safe.

The moment you file a Section 83(b) election, everything changes. That same regulation states that your stock is now treated as outstanding, and you are immediately considered a full legal shareholder for all S Corp purposes. ¹ Your personal tax filing has fundamentally altered the company’s legal structure, effective from the date you were granted the stock.

The Domino Effect of a Single Filing

This status change creates a direct path to disaster if not managed perfectly. The company’s leadership might not even know you filed the 83(b) election, as it’s your personal tax matter.

Imagine the company decides to make a profit distribution to its shareholders. Unaware of your new status, they pay out distributions to the original founders but not to you, because your shares haven’t vested yet. In that instant, they have made a disproportionate distribution.

That single action creates two classes of stock: the shares that received a distribution and your shares that did not. This violates the “one class of stock” rule and instantly terminates the S Corp election. ¹ A private, one-page form you mailed to the IRS for your own benefit has just triggered a corporate-level tax catastrophe.

Three Real-World Scenarios: The Good, The Bad, and The Ugly

Your decision to file an 83(b) election isn’t just about tax theory. It has real, tangible financial outcomes that depend entirely on the company’s future success and your own career path. Let’s explore the three most common scenarios.

Scenario 1: The High-Growth Startup (The Dream Outcome)

Meet Alex, an early employee at “Innovate S Corp.” Alex receives 20,000 shares of restricted stock when the company is just starting out. The stock’s fair market value is a tiny $0.05 per share. The shares vest over four years.

Alex is confident in the company’s future and decides to file a Section 83(b) election. The company grows explosively, and four years later, the stock is worth $30 per share when Alex sells.

Alex’s Choice	Financial Outcome
Files 83(b) Election	Alex pays ordinary income tax on the initial value ($0.05 x 20,000 = $1,000) upfront. The future gain ($599,000) is taxed at the lower long-term capital gains rate. This choice results in massive tax savings.
Does NOT File 83(b) Election	Alex pays ordinary income tax on the value of the shares as they vest each year. As the stock price climbs, this creates huge, recurring tax bills. The total tax paid is significantly higher due to more income being taxed at the higher ordinary rate.

In this best-case scenario, the 83(b) election is a home run, saving Alex tens of thousands of dollars in taxes and converting the bulk of the windfall into more favorably taxed capital gains.

Scenario 2: The Stagnating Company (The Painful Mistake)

Now consider Ben, who joins “Steady S Corp.” Ben also receives 20,000 shares of restricted stock valued at $0.05 per share and files an 83(b) election, paying tax on the initial $1,000 value.

Unfortunately, Steady S Corp struggles. After four years, the company hasn’t grown as expected, and the stock is still only worth $0.05 per share when Ben’s shares fully vest.

Ben’s Choice	Financial Outcome
Files 83(b) Election	Ben paid tax upfront on a gain that never materialized. While the tax amount was small, it was still money paid for no benefit. He locked in a tax liability on value that never grew.
Does NOT File 83(b) Election	Ben would have paid tax as the shares vested. Since the value never increased, the tax owed at vesting would have been the same as the tax at grant. He would have deferred the tax payment for four years with no downside.

Here, the 83(b) election provided no benefit and created an unnecessary upfront tax payment. While not a disaster, it was a financially inefficient choice based on optimism that didn’t pan out.

Scenario 3: The Early Departure (The Worst-Case Scenario)

Finally, meet Chloe, who joins “Spark S Corp.” She receives 20,000 shares at $0.05 each and, like the others, files a timely 83(b) election, paying tax on the $1,000 grant value.

After 18 months, well before her shares are fully vested, Chloe decides to leave the company for another opportunity. According to her grant agreement, she forfeits all of her unvested shares.

Chloe’s Choice	Financial Outcome
Files 83(b) Election	Chloe forfeits her unvested stock. The tax she paid to the IRS on the initial grant value is *non-refundable*. ¹⁷ She is out the cash for the taxes with absolutely nothing to show for it. This is the biggest risk of the 83(b) election.
Does NOT File 83(b) Election	Chloe would have paid no tax at grant. She would have paid tax only on the small portion of shares that vested before she left. She would forfeit the unvested shares but would not have paid any tax on them, avoiding a total loss.

Chloe’s story illustrates the catastrophic risk of the 83(b) election. The irrevocable nature of the filing means that if you don’t stay long enough to vest your shares, you lose not only the potential equity but also the real money you paid in taxes.

The Founder vs. Employee Tug-of-War

The decision to allow and manage 83(b) elections creates a natural tension between the S Corp’s founders and its employees. Their goals and risk calculations are fundamentally different, and understanding both perspectives is key to finding a workable solution.

The Founder’s Perspective: Fear of Compliance and Corporate Ruin

For a founder, restricted stock is a critical tool. It helps attract top talent when cash is tight and aligns the employee’s incentives with the company’s long-term success. ¹⁸ Giving employees a piece of the pie motivates them to build value. ²

However, the 83(b) election introduces two major headaches. The first is the administrative burden. The founder and their finance team must meticulously track which employees have filed the election to ensure every single distribution is paid out correctly and proportionally. ² This requires flawless record-keeping.

The second, far greater fear is the existential risk to the S Corp itself. A single mistake—one disproportionate distribution made because someone forgot or didn’t know about an employee’s 83(b) filing—can instantly kill the S Corp status. ³¹ For the founder, the primary concern is protecting the company’s legal and tax structure from an accidental, self-inflicted wound.

The Employee’s Perspective: A Calculated Bet on Future Growth

For the employee, the decision is a personal financial gamble. The potential reward is huge: significant tax savings that could amount to tens or even hundreds of thousands of dollars in a successful company. ²³ The choice hinges on a few key factors.

First is confidence in the company’s growth prospects. The election only makes sense if the stock is expected to appreciate significantly. ²³ Second is the ability to pay the upfront tax. Even if the stock value is low, the employee must have the cash on hand to pay the tax bill within a few months of the grant. ²⁶

Finally, the employee must have a high tolerance for risk. They have to be comfortable with the fact that if they leave the company early and forfeit their shares, the tax money they paid is gone forever. ¹⁷ The lower the stock’s valuation at grant, the more attractive this bet becomes, as the upfront tax is minimal. ³²

Pros and Cons of Filing a Section 83(b) Election in an S Corp

Making the decision requires a clear-eyed look at the potential upsides and the very real downsides. This applies to both the employee making the choice and the company allowing it.

Pros (The Upside)	Cons (The Downside)
Huge Potential Tax Savings: You convert future appreciation from high-rate ordinary income to low-rate long-term capital gains, potentially saving a fortune.	Risk of Total Forfeiture: If you leave before vesting, you lose your unvested stock and the taxes you paid on it are gone forever.
Tax Bill Predictability: You pay a known, often small, amount of tax upfront and avoid surprise tax bombs at each vesting date when the stock value might be high.	Upfront Cash Required: You must have the cash to pay the tax on the grant value shortly after you receive the stock, even though you have no liquidity from the shares.
Starts the Capital Gains Clock: Your one-year holding period for long-term capital gains treatment begins on the grant date, not the vesting date, allowing you to qualify sooner.	Company Value Might Stagnate or Fall: You could pay tax on value that never actually increases, meaning you paid tax for no benefit.
Simplifies Future Tax Reporting: Once the election is filed, you don’t have to calculate and report income at every single vesting event, which can be a complex tracking task.	Creates Major S Corp Compliance Risk: Your filing instantly makes you a shareholder, exposing the company to the risk of a fatal “one class of stock” violation if they mismanage distributions.
Locks in a Low Valuation: For very early-stage companies, you can lock in a near-zero tax basis, maximizing the amount of future growth eligible for capital gains treatment.	Irrevocable Decision: Once you file, you cannot change your mind. The IRS almost never grants permission to revoke an 83(b) election.

Mistakes to Avoid: Common and Costly Errors

Navigating this process is filled with potential pitfalls for both the employee and the company. A single misstep can have severe and irreversible consequences.

Missing the 30-Day Deadline: This is the most common and fatal error. The 30-day window is absolute. ⁴ If your filing is postmarked on day 31, the election is void. There are no extensions and no excuses.
Company Failing to Track Elections: For founders, ignorance is not bliss. Failing to have a mandatory notification system for 83(b) filings is a recipe for disaster. Without knowing who has filed, you cannot ensure compliant, pro-rata distributions.
Making a Disproportionate Distribution: This is the direct consequence of the previous mistake. Paying a distribution to some shareholders but not to an employee who has filed an 83(b) election instantly creates a second class of stock and terminates the S Corp status. ¹
Employee Forgetting to Pay the Tax: Filing the 83(b) election is only the first step. You must then include the income on your tax return for that year and pay the corresponding tax. Forgetting to do so can lead to penalties and interest from the IRS.
Using an Incorrect Fair Market Value (FMV): The company must make a good-faith effort to determine the stock’s FMV at the grant date. ³² Simply using the par value without justification can be challenged by the IRS, potentially leading to a higher tax bill for the employee. A formal 409A valuation is the safest approach. ³²
Assuming the Election Applies to Stock Options: A Section 83(b) election cannot be made on the grant of a standard stock option. ²⁷ It only applies when actual property (stock) is transferred, such as with an RSA or upon the early exercise of an unvested option. ²²

The Step-by-Step Guide to a Flawless 83(b) Filing

The IRS has made the process more straightforward by creating a specific form for the election: Form 15620. ³³ Following these steps precisely is critical to ensuring your election is valid.

Step 1: Gather Your Documents (Immediately)

The 30-day clock starts ticking from your stock grant date. Do not delay. You will need your official Restricted Stock Award Agreement. This document contains all the key information you’ll need for the form, such as the grant date, number of shares, and vesting restrictions.

Step 2: Complete IRS Form 15620, Line by Line

This form is your official election. Fill it out carefully and accurately.

Box 1: Taxpayer Information: Enter your full name, address, and Social Security Number (or Taxpayer Identification Number). ³⁴
Box 2: Property Description: Be specific. Write something like: “20,000 shares of Common Stock of Innovate S Corp.” ³⁴
Box 3: Date of Transfer: This is your grant date from the award agreement. This date is critical as it starts the 30-day clock. ³⁴
Box 4: Taxable Year: This is the calendar year in which the grant date falls. ³⁴
Box 5: Restrictions: Describe the vesting schedule. For example: “These shares are subject to forfeiture. 25% of the shares vest after one year of service, with the remaining 75% vesting in equal monthly installments over the subsequent 36 months.” ³⁴
Box 6: Fair Market Value (FMV): This is the value per share on the grant date, multiplied by the number of shares. Your company must provide you with this FMV. For example: $0.05 (value per item) x 20,000 (quantity) = $1,000 (total FMV). ³⁴
Box 7: Amount Paid: Enter the amount you paid for the stock. In most RSA cases, this will be $0. ³⁴
Box 8: Amount to Include in Gross Income: This is the result of Box 6c minus Box 7c. For most, this will be the same as the total FMV. ³³
Signature: Sign and date the form. Your signature makes it a legal declaration.

Step 3: Mail the Form to the IRS (The Right Way)

This is the most crucial step. You must mail the original, signed Form 15620 to the IRS service center where you file your annual tax return.

Use Certified Mail, Return Receipt Requested: This is non-negotiable. The certified mail receipt from the post office is your legal proof that you filed on time. ²² The IRS does not send confirmations. ¹⁸
Make Copies: Before you mail anything, make at least three copies of the signed form.

Step 4: Distribute the Copies

The regulations require you to provide copies to other parties.

Mail one copy to your employer (the S Corp). This is how you officially notify them of your election, which is critical for their compliance. ²²
Attach one copy to your personal federal income tax return for the year of the grant. ²²
Keep one copy for your permanent records. You will need this when you eventually sell the stock.

Frequently Asked Questions (FAQs)

1. Can my S Corp stop me from filing an 83(b) election?

Yes. The company can make it a condition of your stock grant that you agree not to file the election. This is a legal way for them to eliminate the compliance risk to their S Corp status. 2

2. What happens if I miss the 30-day deadline?

No. The election is permanently void. There are no extensions or exceptions. You will be taxed on the value of your stock as it vests, at ordinary income rates, which could be much higher. 4

3. If I file an 83(b) and leave my job, do I get my tax money back?

No. The tax you paid is non-refundable. If you forfeit the unvested shares, the tax payment is a complete loss. This is the primary financial risk you must accept when making the election. 17

4. How is the Fair Market Value (FMV) of a private S Corp’s stock determined?

No. The company must use a reasonable, good-faith method. This often involves a formal 409A valuation from an independent appraiser, especially if the company has recently raised money from investors. 32

5. After filing an 83(b), do I have to pay tax on the S Corp’s profits even if I don’t get cash?

Yes. As a shareholder, you will receive a Schedule K-1 each year. You must report your share of the company’s profits on your personal tax return and pay tax on it, creating “phantom income.” 8

6. Does an 83(b) election apply to stock options?

No. It does not apply to the grant of a standard stock option. It only applies when you receive actual stock, such as with an RSA or if you “early exercise” an unvested stock option. 27

7. Can an accidental S Corp termination be fixed?

Yes, possibly. The IRS has a relief provision for “inadvertent terminations.” If the company can prove the mistake was unintentional and takes corrective action, the IRS may reinstate the S Corp status, but it is a costly and complex process. 5

8. Do I get voting rights on my unvested shares after filing an 83(b)?

Yes, typically. With an RSA, you often receive voting rights from the grant date. Since the 83(b) election makes you a shareholder for tax purposes, you are generally treated as a full shareholder in all respects. 15

9. What if the S Corp makes a mistake and pays me a distribution by accident?

No. If you haven’t filed an 83(b), you are not a shareholder, and receiving a distribution could be seen as creating a second class of stock. You should immediately notify the company to correct the error.

10. Do I need a lawyer or tax advisor to file an 83(b) election?

Yes, it is highly recommended. While the form is simple, the consequences of the election are complex and permanent. Professional advice is crucial to ensure you understand the risks and benefits for your specific situation.