Updated October 9, 2026. A phantom equity plan pays a bonus that tracks the value of company shares. You do not receive real stock, votes, or a shareholder’s rights. You receive a contractual promise, usually paid in cash when the award vests or when the company is sold.
The tax treatment in 2026 is still ordinary income when you are paid, and the company gets a compensation deduction then, if the plan complies with Section 409A. A plan that defers payment and violates 409A can trigger income tax on vesting plus an extra 20% federal tax and interest. The written plan has to set the payment time in a way 409A allows. Vesting can be time-based or tied to a sale.
“Recent changes in 2023” on the old version of this page are not a current tax alert. Before adopting a plan, have counsel check 409A and, if the company is an LLC, whether the waterfall is a profits interest instead. A profits interest is actual equity and is taxed differently.