Stock Compensation Plans
If you are one of the rising number of employees receiving some form of stock compensation through your job, you know how confusing it can be to understand how each type works and the varying tax considerations you need to be aware of.
Stock Options:
If you are one of the rising number of employees receiving some form of stock compensation through your job, you know how confusing it can be to understand how each type works and the varying tax considerations you need to be aware of.
Nonqualified Stock Options
:
The difference between the value of the shares on the purchase date and the price you are paying is the “spread” and is included in your wages, with taxes withheld on it, in the year of exercise.
Incentive Stock Options
:
When you exercise the options/buy the stock, you do NOT have to include the “spread” in your ordinary income as with NSOs, although the ISO spread may in some cases trigger alternative minimum tax (AMT).
Employee Stock Purchase Plans (ESPPs):
Employee Stock Purchase Plans allow employees to purchase employer's stock at a discount, usually through contributions made via payroll deductions. The employee contributes to a stock purchase fund and, at certain points during the year, the employer uses the funds to purchase stock for him/her at the discount. Taxation occurs upon the sales of the stock. The calculation of the amount of ordinary income vs. capital gain depends on whether the ultimate sale of the stock constitutes a qualifying or disqualifying disposition.
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