You pay two types of payroll taxes. It's 6. HI hospital insurance or Medicare is 1. Your payroll taxes on gains from exercising your NQ stock options will be 1. You won't pay more than 6. Medicare continues to be taxed regardless of income, with a 0. It has no wage base. You will pay a total of 7. Your payroll taxes will switch to 1. You should not exercise employee stock options based only on tax factors.
But you will pay payroll taxes on it if you've held a stock with options, and you decide to exercise when you have no other earned income. That might be one time when you decide to exercise based on taxes.
All income from the spread is subject to income tax in addition to the payroll taxes. The extra gains are taxed as a capital gain , or as a capital loss if the stock price went down, if you hold the stock after you exercise and achieve additional gains beyond the spread.
Unlike NQ stock options, a gain on incentive stock options is not subject to payroll taxes, but it is subject to income tax. There can be two tax outcomes when you exercise an ISO. You'll pay tax on the difference between the market price at the time of sale and the exercise price when you exercise the ISO and sell the stock in the same calendar year. It's taxed at your ordinary income tax rate. Gains made from investments that you hold for one year or less are taxed as ordinary income.
You're taxed at the capital gains tax rate if you hold them for more than one year. These rates can be lower. The difference between the exercise price and the market price becomes an AMT preference item if you exercise the ISO but hold the stock. You can get a credit for any excess AMT tax if you pay too much, but it can take many years to use up this credit.
The difference between the exercise price and the market price when you sell is taxed as a long-term gain rather than as income if you hold the shares for one year from your exercise date, or for two years from the grant date of the option. But there are some risks to this strategy.
Tax rules can be complex. A good tax professional or financial planner can help you estimate the taxes and show you how much you'll have left after all taxes are paid if you choose any of these options. They can provide guidance on ways to time the exercise of your options to pay the least tax possible. Regardless of whether you receive incentive stock options or non-qualified stock options, know that both are subject to taxes and need to be accounted for when you file.
The most important thing to remember is that once you exercise your options, the result is the same—you now own stock in the company, and that stock can help you pad your financial future beyond your regular paycheck. Most of the decisions and actions we make in life can be boiled down to two components: intention and attention. Nearly 70 percent of Americans ages 65 and older will eventually need long-term care, often at an exponential cost.
Please remember that past performance may not be indicative of future results. Moreover, you should not assume that any discussion or information contained on this blog serves as the receipt of, or as a substitute for, personalized investment advice from Brighton Jones LLC. Brighton Jones LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Please remember that you should never communicate any personal or account information through social media and it is important to familiarize yourself with their respective privacy and security policies.
Events Client Login Contact Menu. August 31, Share on facebook. Share on twitter. Share on linkedin. Share on email. ISO vs. How to Plan for Employee Stock Tax Implications Regardless of whether you receive incentive stock options or non-qualified stock options, know that both are subject to taxes and need to be accounted for when you file.
Read more from our blog: Exercising Stock Options? While A valuation is beyond the scope of this post, it is important to know that such valuations tend to be expensive and often require a reliable independent appraisal or a valuation from an expert who may be an insider.
An ISO needs only be determined in good faith by the board of directors. This is a much more reasonable and less onerous standard.
ISO is highly regulated. Incentive Stock Options must conform to the various requirements of Section of the Internal Revenue Code, the most important of which are as follows:. Any shares exercised over the cap receives NSO treatment. This requirement requires much planning on the part of the company and the employee to avoid an ISO disqualification. One of the most important NSO requirement is setting the exercise price or strike price at fair market value at the date of the grant.
As mentioned earlier, a A valuations is needed with an NSO, which remains a cumbersome and often expensive process. For instance, if you do not hold the ISO for the minimum holding period, the stock is treated as though it were an NSO. The holding period in question is composed of two parts: The stock must be 1 held for two years from the date the ISO was first granted and 2 one year from the date the stock option was exercised. This holding period is often the reason why the ISO treatment is lost.
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