What types of taxes are required to be withheld on exercise of stock options?

July 13, 2005

Subject:   Stock plan administrator
Date:   Fri, 20 May 2005
From:   Stacy

Hi Mike,

I am a brand new stock plan administrator for a company that went public six months ago. We are having an issue with taxes and same-day sales of ISOs. It is our policy to withhold taxes for all employees who exercise in a same-day sale for both ISOs and NQOs, unless the employee asks us not to for an ISO. What types of taxes are required to be withheld?




Date:   Wed, 06 Jul 2005

Hello Stacy,

Your company should have a CPA firm that can answer these questions. NQOs are subject to income tax withholding and employment taxes (including social security, medicare and unemployment taxes) for the excess of the fair market value of the shares over the option price for vested shares. No withholding or payment of employment taxes are required when “qualified options”, including ISOs and ESPPs, are exercised. (The American Jobs Creation Act of 2004 resolved the issue of employment taxes for qualified options.)

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

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