As an employee, have you ever thought about venturing out and investing in the stock market? If so, an employee stock option might be the route for you. If you have an employee stock option, you are able to buy company stock at a set price.
It is important to note that there are two different types of employee stock options: nonqualified and incentive. Regardless of the option that you choose, you will have a certain amount of time to sell them.
Non-qualified Stock Options (NSO)
Most employees will be offered non-qualified stock options as a part of their benefits package. These stocks will experience the following; income tax that is equal to the discounted price minus the market price of the stock at the time of purchase, social security and Medicare tax.
Incentive Stock Options (ISO)
One advantage of incentive stock options is that they receive tax exemptions. This does not mean that these stocks are tax-free, just that the exemption reduces taxable income. In incentive stock options, you have two choices. First, following your waiting period, you can exercise the right that you were afforded after you bought the option to see if the income tax can be waived. Second, you could sell your stocks during the waiting period and experience the same income tax as you would with a non-qualified stock option. Unlike NSO’s, there are a lot of restrictions on incentive stock options. These restrictions include the following; yearly limit of $100,000 when you are exercising your stocks and unless stated in your will, you are not allowed to send your stocks to your family.
Exercising your Right
Before an individual is able to exercise their stock, they will most likely have to endure a “waiting period”. There are plans that will stop you from selling all of your stocks at the same time, therefore, you might only be allowed to sell a small portion of your stocks over a certain amount of time.
When it comes to exercising your stock options, timing is key. It is risky exercising too early as well as waiting until the end of your vesting period, which is a period time that an employee has to wait before they are able to exercise their employee stock options. Holding onto your stocks until the last minute is always risky as you will be forced to sell for whatever the price.
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