Tax withholding rate stock options

There are two types of employee stock options , non-qualified stock options NQs and incentive stock options ISOs.

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Each are taxed quite differently. Both are covered below.

When you exercise non-qualified stock options, the difference between the market price of the stock and the grant price called the spread is counted as ordinary earned income , even if you exercise your options and continue to hold the stock. Earned income is subject to payroll taxes Social Security and Medicare , as well as regular income taxes at your applicable tax rate. If your earned income for the year already exceeds the benefit base than your payroll taxes on gain from exercising your non qualified stock options will be just the 1.

If your year-to-date earned income is not already in excess of the benefit base than when you exercise non-qualified stock options you will pay a total of 7. In addition to the payroll taxes, all income from the spread is subject to ordinary income taxes.

Tax Topics - Topic Stock Options

If you hold the stock after exercise, and additional gains beyond the spread are achieved, the additional gains are taxed as a capital gain or as a capital loss if the stock went down. Unlike non-qualified stock options, gain on incentive stock options is not subject to payroll taxes, however it is of course subject to tax, and it is a preference item for the AMT alternative minimum tax calculation.

When you exercise an incentive stock option there are a few different tax possibilities:.

Tax rules can be complex. Search the site GO.

Taxation of Employee Stock Options - NQs and ISOs

Updated May 24, Taxation of non-qualified stock options When you exercise non-qualified stock options, the difference between the market price of the stock and the grant price called the spread is counted as ordinary earned income , even if you exercise your options and continue to hold the stock. Get Daily Money Tips to Your Inbox Email Address Sign Up.

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