Do Non-Qualified Stock Options disqualify me from a SIMPLE?

February 21, 2000

Subject:   NQSO income for IRA
Date:   Sat, 5 Feb 2000
From:   Stuart


Your answer to the 11/6/99 NQSO/IRA question said that NQSO income would qualify for an IRA.

Followup question: Like the previous questioner, I have no W-2 earned income. I only have 1099 consulting Schedule C income. I set up a SIMPLE plan (at Fidelity) with me being the employer and employee. Now, I’m consulting (as a 1099 contractor) at a company who granted me NQSO’s. The company has a qualified retirement plan (401(k)) for its employees. By exercising my NQSO, doesn’t this give me “earned income” from the company which makes me an “employee” and therefore disqualifies me from having a SIMPLE. In other words, since the company has a qualified retirement plan, and I have wage (earned?) income from the NQSO exercise, then even though I’m NOT an active participant in the company’s qualified plan, I thought the IRS disallowed me from having a SIMPLE, or an IRA.

I hope this makes sense. My guess is that I’m an employee for the purposes of taxation but not for the purpose of being eligible for their qualified retirement plan, so therefore I CAN have my own IRA or SIMPLE.

Follow-up question: As a 1099 contractor who exercises NQSO’s, do I pay the entire 15.3% FICA/medicare tax or does the company give me a W-2 for the “wages” and pay the company’s portion via payroll tax? If it’s “either way”, who decides what to do?

Thank you for the information.



Date:   9 Feb 2000

Hello Stuart,

Unlike incentive stock options, non-qualified stock options can be issued to people who aren’t employees.

The ordinary income that is reported when a NQO is exercised is not wages to be reported on Form W-2, but is additional income to be reported on your Schedule C.

The company is not responsible for withholding taxes when a non-employee exercises a NQO. The non-employee is responsible for making his or her own estimated tax payments.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, “Executive Tax and Financial Planning For Non-Qualified Stock Options”.

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