Are Non-statutory Stock Options the Same As Non-qualified Stock Options?
Non-qualified and non-statutory stock options refer to the same thing. The Internal Revenue Service calls the most common type of stock option non-statutory, while most companies and employees with stock options refer to the same financial tool as non-qualified stock options.
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Stock Options
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An employee stock option is a contract that locks in a price for company shares and allows an employee to buy company stock at the locked-in price at some time in the future, when share prices hopefully have risen. Stock options form part of many employees' compensation packages and can be a lucrative benefit.
Non-qualified and Non-statutory
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Most employees with stock options receive non-qualified stock options, which the IRS and many accountants call non-statutory stock options. When an employee uses these options to buy stock, they must report the difference between the market price and the option price as income and pay income taxes on the difference.
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Incentive and Statutory
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Most people call the other type of stock option an Incentive Stock Option or ISO. The IRS refers to the same thing as a statutory stock option. ISOs generally go to executives and upper-management. Recipients pay taxes on ISOs, but report profits as capital gains, which carries a lower tax rate instead of income.
Tax Considerations
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People using non-qualified or statutory stock options must report the purchase as income in the year they use the option. As reporting the benefit as income could push an employee into a higher tax bracket, "USA Today" financial correspondent Sandra Block recommends planning purchases well in advance. If an employee buys stock with options and keeps the shares, they still need to report the difference in prices to the IRS, but after a year, any additional profit made from share prices rising can be reported as capital gains.
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