Stock Options and Tax Withholdings
- All types of employer stock option plans allow the employee to gain money by using stock options as a substitute for higher wages. A qualified stock option plan does not require withholding, and the company cannot deduct a wage expense. A non-qualified stock option plan does involve withholding, and the company can deduct a wage expense, so companies prefer this type of plan, according to the Bureau of Economic Analysis.
- Incentive plans reward corporate executives when the value of the company's stock increases, and are usually not available to most employees. The exercise price of the option must be at least the current value of the stock.
- An employee stock purchase plan allows employees to benefit from owning the company. Unlike an incentive option plan, the corporation can set an option exercise price up to 15 percent below the value of the stock when the employee buys the option. An employee stock purchase plan is meant for employees below the executive level.
- With a non-qualified stock option plan, the employer offers to sell a stock option to the employee, and may sell the option for less than the value of the stock. If the stock trades on an exchange, the value of the option is known, so the difference between the market price and the exercise price is wage income and subject to immediate withholding. If the stock does not trade on an exchange, the option value is unclear, and the employee reports wage income after exercising the option.
- There are resale restrictions on qualified stock options and violating the restrictions changes the sale revenue to regular income. If the employee sells the stock option within two years after receiving it, or less than a year before the employee receives the right to exercise the stock option, the stock option becomes a non-qualified stock option. According to the U.S. Code, the revenue from the sale is income for the employee and a compensation expense for the employer, but it is not subject to federal withholding.
