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. Here's a quick description of the most common
plans.
Stock Options
Having a stock option gives you the right to purchase a certain number of shares of company stock at a pre-set price, which is called the "exercise price."How they are taxed depends on the type of stock option:
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 a
discount.
Taxation occurs upon the sale 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.
Restricted Stock
Restricted Stocks are granted to an
employee.They are nontransferable and
can be forfeited under conditions such as employment termination or inability
to meet certain performance benchmarks.The employee is granted shares over a period of time, according to a
vesting schedule lasting several years, and also receives voting rights.How they are taxed depends on whether an
83(b) election has been made:
- Without 83(b) election: The entire amount of the stock - the fair market value on the vesting date (the date that restrictions on your stock rights lapse) - is included in ordinary income/reported on W-2 in the year of vesting.
- With 83(b) election: The value of the stock on the grant date, not the vesting date, is reported as ordinary income/taxed in the year granted.
Restricted Stock Units
A Restricted Stock Unit (RSU) is a
promise by the company to grant a set number of shares of stock upon completion
of a vesting schedule.The employee is
granted shares of stock after vesting and forfeiture requirements have been met
and does not have voting rights during the vesting period since no stock has
been issued.
The fair market value of the stock
on the vesting (or settlement) date is reported as ordinary income/on the W-2
in the year of vesting and, once sold, the difference between the sales price
and the fair market value on the vesting date is reported as a capital gain or
loss.
If you have questions about the tax
treatment of your stock compensation plans, please feel free to reach out.