Employees with stock options who submit tax reports in the United States need to take taxation considerations into account. In addition, knowing the amount of tax that needs to be paid when selling stocks is advisable.
The option to buy stock is referring to a future date when it could be utilized in order to gain financial profit. The option is sold at a lower price rate than the price in the stock market, in order for it to be profitable.
Employers in many different fields in the workforce choose to offer their workers these options in order to achieve two goals: one is to generate an interest in the worker for the company to succeed, and its stock value to go up at a future date that the option refers to as well as to improve the working conditions in the company.
That being said workers who receive options to purchase stocks given to them by the employer must consider all the taxation implications. This is applicable all over the world and especially in the United States, where every citizen or anyone with an American citizenship are required to submit a tax report. In addition, the tax authorities in the United States make a distinction between two types of stock options for employees.
What are NSSO Options?
Non statutory stock options, or NSSO for short, are mainly given to executives or outside contractors. In most cases they are not an inherent part of the employee incentive plans and therefore do not count as incentive stock options (ISO) – But they do create an opportunity for a tax event to take place in which they can be chosen to be redeemed.
The so-called tax event is referenced as exercised and requires the tax payment as was set in the American law system. When it comes to the employer, the upsides of non – statutory stock options come into play in that they can be deducted as a known expense.
The deduction is made according to the difference between the cost of the option and the price of the stock, and when it comes to start – up companies or smaller places of employment this could be financially significant.
How is taxation on non – statutory stock options calculated?
The taxation calculation on non – statutory stock options is done at the date of the option being utilized. In the United States the tax is imposed according to the calculation of the average share price on the said day, with the exception of options that are non – qualified or non – statutory – where the difference between the cost of the option and the price of the stock is considered regular income.
Technically, employees with options such as these that are required by local law to submit a tax report, receive a W – 2 form and fill it out. On the basis of the information that appears in the form a deduction of taxes is also made on income and the payment of health insurance and social security funds.
How is the taxing on NSSO options timed?
It is also important to know that the timing on the taxation of options such as non – statutory stock options is influenced by two different scenarios. In the first scenario the option that is registered is on a stock that is being traded in the stock exchange and therefore its value can be decided in a continuous manner.
Here there is no tax event at the date of the options being given. That being said, when the employee decides to convert the option a tax event does occur and is decided according to the height of the difference between the price of the stock and the cost of the redemption of the option. So, if for example the option was realized but the stock was not sold, where the tax authorities are concerned the income will grow at the height of this difference.
For comparison’s sake, in the second scenario the option is for stock in a company that is not being traded in the stock exchange at all and therefore its value cannot be determined in a continuous manner. The solution is to recognize the income only going by the difference between the cost of the option and what is considered a “fair value” for the stock, as long as the status of the option becomes substantially vested.
What are statutory stock options?
Statutory stock options are given to employees as incentives to motivate them, or as part of an option purchasing plan that the employers offer every worker who is interested in it. In order to receive the tax incentives in options that are statutory stock options two cumulative conditions must apply: firstly, the holder of the options must be an employee of the company when receiving the options (from the time that they are given in the up until three months before utilizing the option).
Secondly, the option must be non – transferable with the exception of cases such as the passing away of the original holder. Failure to meet these conditions will force the taxation of the options in the United States as non – qualified or non – statutory options and will come at the cost of tax benefits.
However, if these conditions are upheld no tax needs to be paid for these options in the United States – not at the date of their receival and not at the date of their usage, with the exception of alternative minimum tax that might possibly apply.
And decided to utilize and sell? This is how the taxation is carried out
Selling stock after utilizing the option is a tax event and therefore it does, of course, require the submission of a tax report. In order to only pay the capital gains tax and not higher taxes two criteria must be met:
- The period of time that the stock has been held – the law in the United States determines a holding period and determines that the employee must hold the stock for the length of a minimum of a year. Likewise, according to the law the minimal amount of a holding period is counted in a consistent way: from the day of the option being utilized until before the sale. If the employee sells the option beforehand, they will pay a higher tax.
Another condition that has to do with the holding period determines that the employee must sell the stock after 24 months at least from the date of receiving the option. That being said, in the case that the option is being sold on the backdrop of conflicting interests even before the dates that are set in the law, it is possible to submit tax report for the employee and pay tax only according to the capital gains tax rate even without a waiting period. - Quantitative threshold – the condition of option granted at a discount sets a quantitative threshold. Firstly, it is determined if at the date that the employee received the options, the price of every option comparative to the price of the stock was 85 percent to 100 percent of the price of the stock or if it was fairly estimated.
Finally, if the stock was sold or the employee owning it had passed away, the worth is reported to the tax authorities as work income according to the lower between these two prices: either the difference between the market worth of the stock at the date of receiving the option and the price of the option or the difference between the worth of the stock at the date of its sale or the passing away of the employee and between the price of the option.
