Employee stock purchase plans allow companies to offer shares to employees at a discount, with contributions deducted from their pay. Tax and securities laws may restrict these plans, and employees must hold shares for a certain period for tax benefits. Employee stock option ownership plans offer employees the option to purchase company shares at a set price, with non-qualified options taxed as earned income.
An employee stock purchase plan is a way for a company to offer shares to its employees at a discount. Shares may be offered at up to a 15 percent discount from the market price at the time of the offering. Employee contributions are generally deducted from their pay, and shares purchased for them at a specified later date. Depending on the length of time the employee owns the shares, the US Internal Revenue Service may deem purchases made under an employee stock purchase plan qualifying or eligible for tax-advantaged treatment.
Employee stock purchase plans may be restricted or governed by tax or securities law. In the United States, employees must hold shares purchased under the plan for at least one year from the date of purchase and two years from the date the option is granted for the gain to qualify for favorable tax treatment. When an employee re-sells shares purchased under an employee share purchase plan, it is generally an exempt transaction in the United States, since the number of shares is relatively small. This means that you are not required to file documentation with the Securities and Exchange Commission. The sale of shares purchased in an employee stock purchase plan will sometimes qualify for favorable tax treatment, and is known as a qualified disposition.
Sometimes employees will have the option to purchase company shares at a set price for a period of time. This is known as an employee stock option ownership plan and is often used by new companies for compensation in lieu of higher salary, and to give employees the opportunity to share in the future success of the company. An employee’s stock option can be exercised at the employee’s discretion, and will generally be exercised if the stock price rises above the option price. Stock options generally expire when the employee leaves the company.
If an employee receives a stock option in lieu of compensation, it is generally considered a non-qualified stock option. In this case, the difference between the option price and the sale price is taxed as earned income when the stock is sold. The company receives a tax deduction for the income earned. This type of transaction does not qualify for favorable tax treatment as the option is considered compensation to the employee.
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