Taxes 101: Employee Stock Purchase Programs

What are Employee Stock Purchase Programs?

Employee Stock Purchase Programs (ESPP) allow employees to buy their company’s shares at a discounted rate . You make purchases with after tax money from your paycheck with payroll deductions. The company will purchase the shares at designated times at prices lower that the market price. This is usually referred to as grant or offer price.

An advantage right off the bat of participating in an employee stock purchase program is getting company shares at a lower price than the market. If you and the company are working hard and business is booming, you can come out ahead. It can be great help as you plan and save for retirement.

You want to make sure, though, that your portfolio is diversified and not too heavily invested in your company. While some employees became wealthy owning stock in companies like Google, if the company goes south you and you’re heavily invested in your company’s shares, you may be left with nothing as was the case with Enron.

What the Tax Implications Are

When you purchase shares through an Employee Stock Purchase Programs, you do not have to pay taxes on them. When you decide to sell your shares,though, expect to pay capital gains taxes. Keep in mind that the difference between discount you had purchased the shares at and the market price is considered taxable as if it were compensation.

To determine taxes owed with selling your shares, you must consider if it was a qualifying or disqualifying disposition. This is determined by how long you’ve held the shares and the time from the beginning of the offering period. Typically if you hold the company shares long enough to have a qualifying disposition you can reduce some of your tax burden (there are exceptions to that rule).

Employee Stock Purchase Programs can be a great tax deferred option for those hoping to build their retirement fund. If you have that option at work, seriously look into it.