Stock options offer employees and executives the right to purchase a stock at a set price. The option expires after a set period of years. If an employee takes advantage of a stock option in the United States when her company's stock price rises, she profits from the difference between the option price and the current price of the stock. Executives and some employees are given nonqualified options which are taxed at higher rates, while employee stock options can qualify for preferential tax treatment under the right circumstances.
Related Searches:
Tax Deferral
The major benefit of employee stock options is that employees pay no tax when they are granted the stock option. Only when these options are exercised do the profits become taxable. The typical maturity rate for an employee stock option is 10 years. A new company can increase in value exponentially. Stock options allow employees to accumulate significant sums of money tax-free, as long as the company is profitable, until the employee cashes in his options and sells them.
Income Tax
If an employee decides to cash in her options and hold onto the shares, she does not pay income tax on the difference between the option price and the stock price. Employees who sell the stock the same day that the option is exercised pay regular income tax rates. In the United States, employees will have the difference between the option price and stock price added to their W-2 forms, and they will have to file this income under schedule D, capital gains and losses. Short-term capital gains of less than a year are taxed at normal rates.
Capital Gains
If an employee exercises a stock option and holds onto the stock for a year, he will achieve significant tax benefits. The difference between the option and market price will be taxed at a much lower capital gains rate, which is 15 percent in the United States for almost all income brackets as of 2010. In 10 percent and 15 percent income brackets, taxpayers will pay no capital gains tax if they cash out their stock options in 2010. Starting in 2011, long-term capital gains rates will increase to 20 percent for most American taxpayers. In addition, employees do not have to pay Social Security or Medicare taxes on income that qualifies for capital gain rates, offering significant savings.
Company Benefits
Companies receive expense deductions for every nonqualified option their employees exercise. This increases the operational cash flow of the corporation, providing them with more funds. In addition, employees who hold onto company stock allow companies more equity to draw on, if a company needs additional funds to carry out business operations.
Tax Treatments for Employee Stock Options. Employee stock options have many possible income tax treatments. The primary factor affecting this is the...
Tax Free Employee Benefits. Including tax-free benefits in employees' salary packages adds value to their employment without increasing their tax burden. Packages...
Employee Stock Option Strategies. A strategy for employee stock options involves timing the sale of acquired stock relative to tax implications. Employers...
