---
title: What Is an Employee Stock Ownership Plan (ESOP)? Benefits & Tax Considerations
description: ESOPs benefit small business owners and their employees, especially over time into retirement! Let's talk about these benefits, how rollovers, cashing out, and taxes work, & why the IRS may take a closer look at ESOPs.
---

[CSI Accounting & Payroll Blog ](https://blog.csiaccounting.com)

# [What Is an Employee Stock Ownership Plan (ESOP)? Benefits & Tax Considerations](https://blog.csiaccounting.com/employee-stock-ownership-plan-esop-benefits-tax-considerations)

 Written by [Bryan Cremeen](https://blog.csiaccounting.com/author/bryan-cremeen) | Jun 23, 2024 4:15:00 PM

As a small business owner, you value your employees. Giving them a slice of the company pie via an employee stock ownership plan (ESOP) is a great way to reward hard work and have a plan for your business’s future. **It can also benefit you a bit, too!**

This is just one of many [options to transfer business ownership](https://blog.csiaccounting.com/methods-transferring-small-business-ownership-family-member), so how do you know if the benefits are best for your business?

At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve gotten a lot of questions about using ESOPs to transfer business ownership, including:

- **What is an ESOP? What are the benefits?**
- **What do I need to know about rollovers and cashing out? What about tax considerations?**
- **Does the IRS target ESOPs? Why?**

## **Benefits of an ESOP**

An employee stock ownership plan (ESOP) is a special kind of **tax-advantaged trust**. You sell your business to the ESOP, and it allows you to get fair market value without having to search for a buyer.

It lets any of your employees obtain a **portion of ownership** that’s vested over time, much like profit sharing is. In a sense, it’s a **reward for longevity with the business**.

Since it makes your employees owners, it can also motivate them to make decisions that make the company as profitable as possible. The ESOP can grow to be a major part of their **retirement savings**.

If you sell all of your shares to the ESOP, you get **capital gains tax rates**. That’s a good deal! 

Otherwise, you don’t have to fully sell the company. You can still be a partial owner for as long as you like. By maintaining some shares, you can **take advantage of the same benefits that your employees do**. Let’s talk more about those benefits in the next section. 

## **ESOP Rollovers, Cashouts, & Taxes**

**An ESOP is very similar to a retirement plan.** The money grows in the account, and it’s tax-deferred. It’s also treated nearly the same for rollovers, cashouts, and taxes.

### **ESOP Rollovers**

Just like with any retirement plan, your employees can **roll over their funds to a different retirement account** if they move to a different business. 

As the owner, it’s not likely that you would want to do this. (Although you *can* if you no longer want to control the business.)

### **ESOP Cashouts**

Then, the employees can cash it out at retirement or earlier (sometimes with penalties – rules vary by ESOP). This process is the same for you, too!

This is also done the **same as a retirement plan**. You check your eligibility and request a distribution from your plan’s administrator. Depending on your ESOP, you may be able to get a lump sum payment or installments over time.

### **ESOP Taxes**

If your employees leave your company and roll over their ESOP funds to a different retirement plan, they may be able to **defer paying their taxes until they cash out**.

Under most ESOPs, when you cash out, you’ll need to pay ordinary **income tax**. You may also face an early withdrawal fee if you don’t meet cashout requirements yet.

## **IRS Targeting ESOPs**

There’s a rumor that the IRS targets ESOPs. This is only partially true; the IRS looks closely at *any* tax-advantaged plan since there’s a potential for abuse.

**The IRS will make sure you’re using the ESOP correctly and following tax laws**, even if it can be complex and expensive to maintain. 

To stay in good standing, make sure that you:

- **Do a cost evaluation every year.**
- **Have a board of trustees.**
- **Follow your ESOP’s rollover, cashout, and tax rules closely.**

[Worried about staying in compliance? Here’s how!](https://blog.csiaccounting.com/small-business-laws-rules-accounting-compliance)

## **Plan Your Business’s Ideal Future With Monthly Accounting**

Now that you know about the benefits of ESOPs, how rollovers, cashing out, and taxes work, and why the IRS takes a closer look at ESOPs, are you ready to check out monthly accounting services?

If so, please consider CSI Accounting & Payroll! While we don’t work directly with ESOPs, we can get your finances in tip-top shape and either look at other business ownership transfer methods or refer you to an ESOP specialist.

To see if we can be a good fit for your business, click the button below for a free consultation:

<https://blog.csiaccounting.com/hs/cta/wi/redirect?encryptedPayload=AVxigLLVOhzxsPiEPke%2FSvpGsUFB3rSQrCB1ct4mtSfcfJCUaVwWmXtG%2BcLmSvAyj7%2F3X5tlKd%2Fsftsag%2FGlW5%2F5Z8z3Gd%2BR4iHvg4g%2FSHFqIOHa17gA2QlQS1qVpHIg%2B%2FvRJCFWmKsKhh%2B9Hzs3ULR4orZvRoIAkGrd5IJIIO%2F28GPnqVwu8ByKcQQwZ8rnu0jZihDrnDcsxEQY&webInteractiveContentId=166729891489&portalId=608619>

Not ready to talk? That’s okay! First, learn more about [how an accountant can set up your business for future success](https://blog.csiaccounting.com/create-better-tomorrow-small-business-accountant).

[View full post](https://blog.csiaccounting.com/employee-stock-ownership-plan-esop-benefits-tax-considerations)

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